Motor Finance Redress: How the FCA’s Consultation Exposes a Regulator Unfit for Purpose

Motor finance was supposed to be simple: you pick your car, sign the PCP or HP, and get on with life. Instead, millions of drivers are now caught up in the UK’s latest mass mis-selling saga, with the FCA itself estimating that around 14.2 million motor finance agreements between 2007 and 2024 were “unfair” because of the way commissions were structured and disclosed.

After years of court battles, culminating in the Supreme Court’s motor finance judgment in August 2025, the FCA has finally produced its long-trailed consultation paper, CP25/27, on a motor finance consumer redress scheme.

Let’s not forget that unfair commission structures within motor finance was brought to the attention of the FCA in 2016, and it has been asleep at the wheel (again) until such time as consumer representative firms forced the hand of the FCA.

1. How we got here – and what the courts actually said

For years, many car dealerships were paid commissions by lenders when they introduced customers to PCP or HP agreements. In the notorious discretionary commission arrangements (DCAs), dealerships could increase the interest rate the customer paid in order to pocket a bigger commission – a conflict of interest that was rarely, if ever, properly explained. The FCA finally banned DCAs in 2021.

In October 2024, the Court of Appeal held that undisclosed commissions without fully informed consent were unlawful, dramatically expanding the potential scope of claims and raising estimates of lender exposure to as much as £44 billion.

Lenders appealed. In August 2025, the Supreme Court clarified the legal position and confirmed many commission structures to be unlawful.

2. What a strong regulator would have done

If you imagine a genuinely muscular regulator faced with:

• millions of mis-sold agreements,
• years of clear industry conflicts of interest, and
• a Supreme Court judgment confirming that at least some of these commissions created unfair relationships,

…you don’t picture a 360-page “please send us your thoughts” exercise.

A strong regulator would have:

1. Taken the Supreme Court judgment and moved immediately to implementation, not yet another round of soul-searching. The FCA had already spent over a year gathering data from lenders and signalling that a redress scheme was on the table if the courts confirmed widespread harm.
2. Set a clear, simple redress formula aligned with the legal position – for example, refunding the unfair extra interest plus meaningful compensatory interest based on the time value of money and the distress/inconvenience caused.
3. Preserved the long-standing norm of 8% simple compensatory interest (or something very close to it) that has applied across countless mis-selling cases and FOS awards, rather than slicing that benefit down at the very moment it matters most.
4. Announced fast, binding timelines for firms to compensate customers, building on the legal position that the majority of firms did not comply with the law or its disclosure rules when they sold these loans.
5. Paired the scheme with visible enforcement, reserving the option of serious fines where firms had knowingly structured products around opaque, high-margin commissions.

That’s what a regulator looks like when it’s prepared to be unpopular with the industry it polices.

3. What we actually got: delay, dilution and deference

Years of drift and endless “pauses”.

This scandal didn’t appear overnight. The FCA has been aware of the issues for nearly a decade.

Once the issue finally blew up publicly in 2024:

• In January 2024 the FCA launched work on historic DCAs and paused complaints timelines so firms didn’t have to answer affected complaints while the review dragged on.
• That pause was then extended to December 2025, and broadened to cover all commission-related complaints, meaning lenders could sit on customer cases for the best part of two years.
• After the Court of Appeal ruling in October 2024, the FCA postponed its decision again, citing data delays and ongoing litigation.

Only in October 2025 did the FCA finally publish CP25/27, proposing a scheme that will not actually pay most consumers until late 2026 at the earliest.

In December 2025 the FCA extended the pause to May 2026, the date when lenders must commence issuing decisions.

Meanwhile, consumers have kept paying inflated interest, and complaints have piled up in limbo.

A consultation shaped around industry comfort

Even now, the FCA has extended the consultation deadline at the request of stakeholders, including major lenders. The regulator says it must weigh:

• the size of the bill,
• the operational strain on lenders and captive finance arms, and
• the risk that “over-correction” could harm the availability of credit.

The markets confirm that the narritive from lenders that fair compensation will damage the industry are completely false, yet the FCA continues to dance to the tune of the finance sector. The net effect is a process that is designed to ensure that lenders are never genuinely concerned of their regulator.

4. The quiet gift to lenders: slashing compensatory interest

The most telling detail in CP25/27 is also one of the driest: compensatory interest.

Historically, when customers receive redress for mis-selling, they are often awarded get 8% simple interest per year on top – the same rate courts generally award.

In this scheme, the FCA proposes something very different:

• Interest will be paid at the Bank of England base rate +1%, averaged over the period – which, on the FCA’s own numbers, works out at a weighted average of about 2.09%.

On paper that sounds technocratic. In practice, it is a huge financial win for the firms that benefitted from the mis-selling in the first place to the tune of an estimated £4 billion.

It’s no surprise that consumer groups and claimant firms have criticised the proposal as a slashing of statutory-style interest, especially given the long delays in getting to this point.

5. Letting lenders mark their own homework

There’s another serious structural weakness in the FCA’s design.

Under CP25/27, lenders will:

• run their own reviews across roughly 14 million unfair agreements,
• apply an FCA-prescribed but heavily assumption-driven model, and
• be able to reject claims on certain assumptions, and
• decide what each customer is owed – with limited scope for independent scrutiny unless the customer complains or goes to the Ombudsman.

A cross-party group of MPs on the APPG on Fair Banking has already warned that this amounts to letting firms be “judge and jury” over their own misconduct, with average payouts under the FCA model significantly lower than court awards in similar cases.

Their report accuses the FCA of favouring lenders’ profit margins and underestimating the true scale of harm by relying on outdated or conservative assumptions.

When the regulator designs a scheme in which:

• the same firms that mis-sold the products run the calculations,
• the interest rate is cut to a fraction of what consumers usually receive, and
• there is no accompanying programme of meaningful fines specifically for this misconduct,

…it’s hard to pretend this is a truly deterrent response.

Yes, the FCA has fined firms in other areas. But in the motor finance scandal, the centrepiece is a carefully calibrated, industry-friendly scheme rather than a fearless use of its enforcement toolkit.

6. This isn’t a one-off – it’s a pattern

If this all feels familiar, that’s because it is.

• In PPI, the FCA eventually presided over more than £38bn of redress – but only after years of dragging, a Supreme Court judgment (Plevin) and a complex compromise scheme that still left many consumers under-compensated.
• In the interest rate hedging products (“swaps”) scandal, the FCA’s redress framework excluded “sophisticated” SMEs, a decision later criticised as irrational and unfair to many businesses that plainly didn’t understand the risks they were sold.
• In the wake of LCF, Connaught and other investment scandals, an All-Party Parliamentary Group spent years reviewing the regulator and concluded it was “incompetent at best, dishonest at worst”, calling for radical reform.

Now, on motor finance – sometimes described as “PPI on wheels” – the same accusations are resurfacing.

Even parliamentarians who are generally pro-markets are losing patience. MPs and campaigners have openly argued that the FCA’s handling of the motor finance saga, stretching back years, shows it is “not fit for purpose”.

When MPs, consumer groups, claimant lawyers and sections of the industry all agree that a scheme is flawed – it’s usually a sign that the underlying design is political rather than principled.

7. “Unfit for purpose” – and what that actually means

Saying the FCA is “unfit for purpose” isn’t just an angry slogan. It reflects something deeper:

1. Structural dependence on the firms it regulates
   The FCA’s whole model is built on firm-led remediation: the idea that if you nudge, consult and guide, banks and lenders will voluntarily clean up their own mess. Time and again, that has proved optimistic at best.
2. A chronic fear of rocking the boat
   From its warnings that the Court of Appeal ruling “went too far” and could destabilise the market, to its public insistence that compensation “must not put lenders out of business”, the FCA approaches systemic mis-selling as a capital-management problem for banks, not primarily as a justice problem for consumers.
3. Endless process where urgency is needed
   The regulator has had years to understand this market. It chose to pause complaints, wait for multiple rounds of litigation, then launch a consultation that will not deliver most payments until nearly a decade after many of the worst abuses took place.
4. A consistent pattern of under-compensation and narrow deterrence
   Whether it’s PPI, swaps or now motor finance, the story is similar: partial redress, complex eligibility hurdles, and little in the way of structural penalties that make future misconduct genuinely unattractive.

Given that history, it’s hard to escape the conclusion that the FCA, in its current form, is not capable of standing up to the largest banks and lenders when it matters. And that’s exactly what a regulator is for.

8. Where does that leave consumers?

None of this means people won’t get money back. If the scheme goes ahead broadly as proposed:

• around 14 million agreements are expected to be treated as unfair,
• average compensation per agreement is forecast at just £700, and
• total industry costs (including admin) are estimated at about £11bn, making this one of the largest redress exercises in UK history, but lenders will still walk away in profit as the current scheme stands.

For an individual motorist, a £700 cheque in 2026 may be extremely welcome. That’s entirely understandable.

But zoom out, and a different picture appears:

• Firms that, by the FCA’s own admission, did not comply with the law or its rules will have enjoyed years (even decades) of extra profit.
• The interest slice of compensation is being quietly shrunk to a level that bares no reflection to the loss caused to the consumer, let alone acts as a deterrent.
• And the regulator is once again trying to close down a scandal without confronting the deeper question: why does this keep happening?

Until the FCA is either fundamentally re-engineered or replaced with something genuinely independent of the industry’s lobbying power, UK consumers will continue to move from one scandal to the next – PPI, swaps, mini-bonds, motor finance, and the upcoming GAP insurance scandal.

For a watchdog meant to guard the public from systemic financial abuse, that really is unfit for purpose.