FCA motor finance compensation scheme explained

Following the Supreme Court decision in August 2025, which found that a lender had acted unfairly because of the high, undisclosed commission paid to its broker, the FCA has issued a consultation paper detailing its proposals to compensate consumers who have been mis-sold car finance. In this article, we provide a summary of the proposed redress scheme and the accounting impact that the compensation scheme will have for lenders.

Discretionary commission arrangements

A key element of the mis-selling case relates to discretionary commission arrangements (DCAs) that were not adequately disclosed.

A DCA is a practice where a motor dealer or finance broker can increase the interest rate for a consumer to earn more commission, without disclosing this to the consumer. The FCA banned DCAs in January 2021.

Summary of the proposed redress scheme

The redress scheme will cover finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable to the broker by the lender. The FCA estimates that 14.2 million agreements (which is around 44% of all agreements made since 2007) will be considered unfair as one or more of the following is inadequately disclosed:

A discretionary commission arrangement
High commission (where the commission is greater than or equal to 35% of total costs of credit and 10% of the loan)
Contractual ties that gave a lender exclusivity or a right of first refusal

The FCA has outlined limited circumstances where lenders can rebut the presumption of unfairness. These include where there is evidence of adequate disclosure of the arrangement, or if the lender can provide evidence that the broker selected the lowest interest rate at which they would not have made any additional commission.

The redress will be calculated as follows:

For serious cases (ie when the commission is greater than or equal to 50% of the total cost of credit and 22.5% of the loan) the consumer will receive a return of commission plus interest in line with the Johnson case, which was considered by the Supreme Court in August 2025.
For all other cases, compensation will be the average of what the FCA estimates consumers have overpaid, or lost, and the commission paid, plus interest.
Interest should be paid on the compensation based on the annual average Bank of England base rate per year plus 1%.

The FCA has estimated an 85% take up of the scheme from eligible consumers based on the take up of past schemes, and that the estimated average compensation will be around £700 per agreement.

The FCA has written to firms outlining the preparatory steps they would expect motor finance firms to take. These are as follows:

To accurately identify and effectively contact impacted consumers (with support from third parties where required);
To gather information to assess whether cases are in scope of the scheme (with support from brokers as required) and reach appropriate decisions;
To ensure that compensation calculations are accurate, and payments are made quickly; and
To ensure that there is no undue delay at any stage of the proposed redress scheme.

Accounting impact

It is expected that the compensation scheme will have the following accounting impacts for lenders:

Redress provisioning – affected lenders should reassess their current redress provisions or recognise new provisions and ensure they are aligned to the FCA’s proposed scheme. This change to the provisioning will have an impact on the profit and loss. Alignment of the provision is likely to be considered the best estimate of redress that management can make.
Going concern – affected lenders should consider the impact of the future cash outflows in their going concern assessment and disclosure in their accounts. This may impact the overall conclusion of whether an entity is a going concern or whether there is a material uncertainty in relation to going concern.
KPIs / key ratios – the provisioning may impact KPIs of affected lenders and the capital adequacy of firms if there is a significant impact on the net assets.
Accounts disclosures – the affected lenders will have to disclose narrative on the redress provision including the basis of estimation and uncertainties around the timing and amount.
Audit impact – the lenders’ auditors will need to audit the completeness of data used in calculating the provision, the accuracy of the methodology used and the completeness of disclosures in the accounts.