Operationalising The FCA’s Motor Finance Compensation Scheme

While there are many articles and assessments on the bigger picture and theory, EQ will be setting out the practicalities on where firms need to focus their efforts now and put the theory into practice. The scale of the project is significant with a 17-year period between 2007-2024 to consider, and an estimated 14.2 million agreements to review. Data, capacity, and process challenges are all being considered as firms now have confirmation of the stages required to remediate this issue.

Before we examine those stages in more detail, we take a high-level look at the some of the more surprising and unexpected elements of the consultation.

Timelines – These are tight. The FCA is expecting the scheme to start the day after they publish the final policy statement, which is likely to be in early 2026. Existing complainants must then be contacted with three months and all other customers within six months. For consumers, the clock starts ticking at the point of initial contact with the FCA expecting firms to take a maximum of three months to investigate and decide if redress needs to be paid. If redress is due, this must be calculated and paid within one month from the date of the determination letter.

This first phase of communicating to all customers within either three or six months is a huge ask when considering the data work that needs to be undertaken to run an outreach programme of this scale. There is also the question of scheduling and attempting to smooth out the customer response activity likely to result from these communications. The end goal being to enable firms to maintain a high standard of customer service throughout their business.

The FCA has also made it clear via it’s Dear CEO Letter of 7th October that they expect both lenders and brokers to start acting now rather than waiting for the final policy statements to be published.

The opt-in approach – This approach to allow customers to opt-in and opt-out of the scheme is very unusual given the circumstances of this remediation and adds a layer of complexity for firms trying to identify affected customers and create cohorts for treatment strategies. Given that the lender is the one holding the details of whether a consumer has been affected, consumers will not know for sure if they are included until they receive confirmation from their lender. The customer engagement requirements also increase here with communications going out to all customers to let them know if they are in scope or not and giving them the option to opt in or out of the suggested scheme.

This even brings customers with no relevant agreements into what will be a huge customer contact exercise. This will significantly increase workload for customer-facing teams as consumers question the communications they receive. There is also an increased risk of mis-categorising customers as communications between consumers and businesses cross over.

Agreement types - In applying the Supreme Court’s judgement in the Johnson case to this compensation scheme, the FCA has categorised three criteria considered unfair:

• a discretionary commission arrangement
• high commission (where the commission is equal to or greater than 35% of the total cost of credit and 10% of the loan)
• contractual ties that gave a lender exclusivity, a right of first refusal or similar arrangements.

It is this last point about tied arrangements that has surprised the industry and requires a new data gathering exercise to collect this information. The first two have been expected and firms are more likely to hold the required data, certainly for more recent cases. However, the complex nature of relationships between lenders, dealers and brokers mean that the last point may be more difficult to evidence. This indicates that firms may struggle to provide the rebuttal evidence required to prove the relationship was a fair one and end up adding more consumers to the cohort for redress and compensation.

Calculation methods – The FCA has also considered the Supreme Court’s Johnson ruling regarding how redress is calculated in these affected cases. As the Court said at the time, the details of the Johnson case were very specific and the FCA expects similar cases to be very rare. When they do occur, firms will be expected to follow the same calculations as the court – commission plus interest.

For other cases, consumers will be compensated the average of the estimated overpayment or loss, and the commission paid plus interest. While some simplification will be allowed if some data is missing, these calculations will require significant transaction level data and details to be accurately assessed and paid. Again, the complexity and specificity of these calculations are unusual in a redress scheme of their scale and size. Firms may be considering the cost/benefit analysis of adopting a simpler operational model that may end up paying more compensation, but that will ultimately save them more in operational costs.

Giving feedback to the FCA

All this results in a compensation scheme that is a little more unusual and complex than perhaps the industry was expecting, while also being one that the FCA wants completed at some speed.

Feedback is being accepted until 4 November 2025 regarding extending complaint handling rules, and 18 November 2025 for the consultation on the proposed redress scheme. There may be some changes to a few of these elements after this feedback, but the fact remains that firms know what they need to do and now need to figure out the how.

In the coming series, EQ will outline what firms need to do to prepare and consider undertaking at 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, 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.