Operationalising Stage 2 Of The FCA’s Proposed Motor Finance Consumer Redress Scheme

In this article we review Stage 2 – Liability Assessment, which sets out the steps firms would take to determine whether customers qualify for compensation.

For lenders, the key is deciding whether they have sufficient evidence to rebut the presumptions identified by the FCA. Each qualifying “relevant arrangement” — containing a Discretionary Commission Arrangement (DCA), a high-commission arrangement, an exclusive or tied relationship, or any combination of these — must be examined to determine whether there is enough evidence to show that no liability arises on the part of the lender or broker.

Step 1 – Identify relevant arrangements

Identify which cases involve a DCA, a high-commission arrangement, or an exclusive/tied relationship. These are the FCA’s relevant arrangements for the scheme.

Agreements that do not include any of these features would generally fall outside the scope of the proposed scheme, although firms must still communicate that outcome to the customer and note that other complaint routes may remain open.

Step 2 – Apply the presumption of unfairness

For each relevant arrangement, the consultation proposes a presumption that an unfair relationship existed where disclosure of the arrangement was inadequate.

Firms can rebut that presumption if they can show that:

• Adequate disclosure was made;
• (For DCAs) the broker selected the lowest interest rate at which no discretionary commission was earned; or
• The customer was sufficiently sophisticated to have understood the arrangement without explicit disclosure (expected to be rare).

Step 3 – Evidence of adequate disclosure

To demonstrate adequate disclosure, firms must evidence that information was clear, prominent, and provided before the customer entered the agreement, and that it would have been understandable to an average consumer.

• For DCAs: disclosure must explain the link between commission and interest rate and the broker’s discretion to set that rate.
• For high-commission arrangements: disclosure must cover both the existence and the amount of commission, or give enough information for the customer to calculate it.
• For exclusive or tied relationships: firms must evidence that the nature of the tie was made clear — including whether the broker was required to introduce customers exclusively to one lender, whether the lender had a right of first refusal, and that any disclosure of multiple-lender access was at least as prominent as the disclosure of exclusivity.

If contemporaneous records are missing or evidence is not available, firms must presume disclosure was inadequate.

Step 4 – Rebutting the unfair-relationship presumption

Where evidence exists, firms should test whether the presumption of an unfair relationship can be rebutted.

This can be done if evidence shows that:

• the broker selected the lowest interest rate permitted under a DCA, or
• the consumer was sufficiently sophisticated to have been aware of the relevant features of their agreement.

Step 5 – Presumption of loss or damage

If firms cannot rebut the unfair-relationship presumption, they must presume the agreement caused loss or damage.

Step 6 – Rebutting the loss or damage presumption

For high-commission and tied/exclusive arrangements, firms may rebut this second presumption only with clear, contemporaneous, customer-specific evidence showing that the consumer could not have obtained a more advantageous offer from any other lender the broker worked with at the time.

Where a broker was exclusively tied to a single lender, such rebuttal will typically not be possible.

Key considerations for Stage 2

Because of the tight proposed timeframes, firms should begin preparing for Stage 2 even before customer communications for Stage 1 are issued. Once a customer opts in to the scheme (or is presumed to have opted in), the firm will have three months to complete both Stage 2 (Liability Assessment) and Stage 3 (Redress Calculation) before sending the provisional redress decision at Stage 4.

The FCA proposes that firms reach provisional decisions within seven months of scheme launch for customers with existing complaints and within fifteen months for new cases. This means the full end-to-end process must be ready shortly after the point communications begin.

Gathering evidence for rebuttals

The success of Stage 2 depends on the evidence firms can collect to determine whether they can rebut the qualifying factors. Evidence falls into two broad categories:

• information that can rebut a whole segment of customers (for example, where a broker consistently selected the lowest permitted rate), and
• case-specific documentation for individual agreements.

This will be a substantial data-gathering exercise across lenders, dealers, and brokers. Firms should design systems to capture, index, and assess evidence efficiently and look for information that can apply across multiple agreements to streamline rebuttals.

An early strategic decision will be how deep to go into rebutting each agreement. Detailed, case-by-case reviews will almost certainly prove disproportionate given the scheme’s timelines — especially as the proposed scope runs from 6 April 2007 to 1 November 2024. Firms should balance additional operational cost against potential redress savings.

We would expect at this stage that most lenders will opt to identify cohorts of customers within their total population where the assumptions can be rebutted at cohort level, rather than relying on individual review of evidence on a case by case basis.

Some “quick wins” may include broker- or dealer-level analysis to identify cohorts where DCAs were not used or where robust disclosure practices already existed. Establishing these cohorts early could provide evidence to rebut whole groups of in-scope agreements and support more efficient processing once the scheme begins.

References

FCA Consultation Paper CP25/27 Motor Finance Consumer Redress Scheme (7 October 2025), chapters 6–8 and Annexes 1–3.

Giving feedback to the FCA

The FCA is accepting feedback until 4 November regarding extending the pause to July 2026 for complaint, and 18 November for the consultation on the proposed redress scheme.

Four stages made clear

In this series, EQ is outlining what firms need to prepare and consider as part of each of the four scheme steps:

• Stage 1 – Identification of scheme cases and consumer consent – Firms to undertake checks to identify if customers are excluded or included in the scheme to and communicate this to their whole customer base.
• Stage 2 – Liability assessment – Firms to assess if they are liable to pay redress to each customer.
• Stage 3 – Calculation of redress – Firms to calculate the total amount of redress for each affected customer.
• Stage 4 –Communicating redress outcomes – Firms to send out the final redress determination letter to consumers and pay all necessary redress.