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The FCA’s 35-10 Motor Finance Redress Test Ignores the Real Harm

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January 7, 2026
Daniel Lee
The FCA’s 35-10 Motor Finance Redress Test Ignores the Real Harm

The FCA’s “35/10” Motor Finance Redress Test Ignores the Real Harm: Interest on Commission Must Count

The FCA’s proposed motor finance redress scheme introduces a controversial “high commission” gateway commonly referred to as the 35/10 test. In principle, we understand what the FCA is trying to do in identifying cases where commission was so large that, had it been properly disclosed, it would likely have changed the consumer’s decision making.

But in practice, the 35/10 test is built on a flawed premise. It focuses on the commission figure alone, rather than the true amount consumers ultimately pay as a result of that commission being financed through the credit.

That distinction matters because in real lending, a £1,000 commission rarely costs the consumer £1,000.

It costs more. Sometimes a lot more.

And if the FCA (and the Financial Ombudsman Service) truly wants a redress framework that reflects real-world detriment, the “total payable” attributable to commission should be used when applying the 35/10 criteria—not the commission-only headline number.

What the FCA’s “35/10” test actually is

Under the FCA’s consultation (CP25/27), a “high commission arrangement” is defined using two thresholds:

  • Commission is at least 35% of the total charge for credit, and
  • Commission is at least 10% of the total amount of credit.

The FCA’s draft rules also define:

  • “Total charge for credit” as the true cost to the borrower of the credit (the familiar concept covering interest and other credit charges under Consumer Credit rules / CONC App 1).
  • “Total amount of commission” as the sum of commission payable in connection with entering into the agreement.

And crucially, the FCA says that when calculating whether the thresholds are met, lenders should look at the relevant values as they stood at the start of the agreement.

So far, so technical.

But here’s the problem:

The test uses “total commission” (a lender-to-broker payment), not the borrower’s “total payable” cost of that commission

The FCA’s definition of the commission side of the equation is not “what the customer paid because of commission”. It’s the commission amount paid in connection with the agreement.

That might be convenient administratively. But it is not consumer-realistic, which is unsurprising when it comes to the FCA.

The FCA itself recognises commission inflates borrowing costs, often by more than the commission amount

This isn’t speculation. The FCA’s own analysis in CP25/27 explicitly links higher commission to higher borrowing costs.

For flat fee loans, the FCA reports that:

  • On average, each £1 of commission was associated with roughly £0.60 higher cost of credit (though not statistically significant across all agreements).
  • But in a “high commission” subset, the FCA found stronger evidence that borrowing costs rose by more than £1 for every £1 of commission, and the effect increases as commission becomes a larger share of the cost of credit and loan amount.
  • In cases where commission was at least 50% of total cost of credit, every additional £1 of commission was linked to about a £1.54 increase in borrowing cost.

That is a key admission:

In high commission scenarios, consumers are often paying more than the commission in increased borrowing costs.

Yet the 35/10 test—used to decide whether commission is “high” for scheme purposes still treats the “commission” as though it’s just the bare broker payment figure.

A real example: £1,000 “flat commission” becomes £1,472.87 to the customer

In an example we’ve seen, the broker received a flat commission of £1,000.00.

That is already alarming high because it raises serious questions about incentive conflicts and whether the consumer could ever have given informed consent to a deal priced around such a large hidden payment.

But the bigger scandal is what happened next:

Once the agreement’s interest was applied, the customer didn’t just “pay” £1,000 in economic terms.

They ended up paying £1,472.87 attributable to that commission, meaning £472.87 was effectively interest charged on the commission cost.

That’s 47.29% extra on top of the commission figure.

This is exactly why a commission-only test is misleading

If you assess “high commission” using the £1,000 number, you may conclude the case falls below a threshold.

But if you assess it using the real customer burden, the total payable attributable to commission (£1,472.87), the outcome changes dramatically.

And when the Financial Ombudsman Service (in the example we reviewed) failed to grapple with this, the result will be predictable. The decision will be focused on an accounting input rather than the consumer’s lived financial outcome, again unsurprising when it comes to the Financial Ombudsman Service.

The internal inconsistency: the FCA accepts “commission + interest” matters for remedies, but not for thresholds

The FCA’s consultation acknowledges that courts can award commission plus interest and specifically notes that:

  • The Supreme Court awarded repayment of commission plus interest in Johnson.
  • The FCA proposes that cases aligning closely with Johnson should similarly be awarded repayment of commission plus interest (subject to its “very high commission” and tie features).

So the FCA recognises that, at least in some circumstances, interest is inseparable from the harm.

But then the scheme’s “high commission” gateway still relies on “total amount of commission” (commission-only), rather than the total payable cost to the consumer attributable to that commission.

That’s not just a technical quibble, it’s a fairness problem.

Because the threshold is meant to identify cases where borrowing costs were disproportionately elevated by commission.

And if the borrowing cost impact is the point, the interest effect cannot be ignored.

Why the commission-only approach risks systemic unfairness

  • It disadvantages people with higher APRs and longer terms. Interest is a multiplier. The higher the APR and the longer the term, the more expensive the “same” commission becomes to the consumer. A commission-only test therefore risks producing false negatives precisely where the consumer detriment is greatest.
  • It entrenches inequality between “prime” and “non-prime” borrowers.Consumers with weaker credit profiles often face higher APRs. If commission is priced into borrowing costs, they may pay significantly more interest “because of” commission—yet the gateway test remains anchored to the lender’s commission figure. That is the opposite of consumer protection.
  • It creates a perverse incentive: hide the harm in the interest rate. If a regime treats commission as a static figure and doesn’t reflect the interest impact, firms can effectively argue about a smaller number—while consumers carry the larger cost through the APR.

Our position: the “total payable” attributable to commission should be used in the 35/10 criteria

If the FCA wants the 35/10 test to reflect “high commission” in any meaningful, consumer-relevant way, it should treat “commission” as:

Commission plus the contractual financing cost of that commission (the interest effect), i.e., the total payable attributable to the commission component.

Call it what it is, the consumer’s commission burden, not the broker’s commission receipt.

A practical, scalable way to do this (without making the scheme unworkable)

We’re not asking for perfection. We’re asking for fairness that can be implemented at scale.

  1. Redefine the numerator for the 35/10 test
    Replace “total amount of commission” (commission-only) with an “effective commission cost to consumer” measure: commission plus interest attributable to the commission amount over the agreement term.
  2. Require lenders to calculate a “commission amortisation cost”
    Firms already have the inputs (APR, term, repayment profile). Calculating the implied interest attributable to a £X component is feasible.
  3. Failing that: add a third gateway limb tied to consumer impact
    For example: if the commission-only test isn’t met, the case can still qualify where the lender’s own data shows the commission was associated with a materially higher APR / cost-of-credit outcome (which the FCA’s own analysis suggests happens in high commission cases).

Why this matters right now

The Financial Ombudsman Service is actively managing consumer expectations and complaint-handling around motor finance commission issues, noting ongoing legal and regulatory developments and temporary complaint-handling rules.

This means the design choices baked into the FCA scheme now will shape outcomes for huge numbers of consumers later.

If those choices embed a commission-only logic that ignores the compounding effect of interest, then even a well-intentioned redress scheme risks becoming a machine for under-recognising detriment.

Conclusion: a redress scheme that ignores interest is not measuring harm

The FCA’s own consultation evidence points in the same direction consumers have been saying all along:

  • Commission affects borrowing costs.
  • In high commission scenarios, borrowing cost impacts can exceed the commission itself.
  • Courts can and do award commission plus interest in appropriate cases.

So it is not credible to maintain a “high commission” test that effectively treats commission as a standalone, interest-free number.

A £1,000 commission that costs a consumer £1,472.87 is not a £1,000 problem.

If the FCA wants the 35/10 threshold to identify disproportionate consumer harm, then the total payable attributable to commission must be part of the criteria.

FCA 35/10 motor finance commission test

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January 6, 2026
Daniel Lee
Re-educating FOS on GAP Demands and Needs

Re-educating FOS on GAP: “Demands & Needs” Isn’t Optional

There’s a moment in far too many of our GAP insurance cases where the conversation stops being about the consumer’s complaint and starts becoming a tutorial.

Not for the dealership. For the Financial Ombudsman Service (FOS).

We find ourselves having to explain and again that a dealership selling an insurance add-on is not just “retail staff offering a product”. The dealership is acting as an insurance intermediary and it has duties that come with that. In particular, it must carry out an adequate and evidenced demands and needs assessment to confirm the policy was suitable for this customer, this vehicle, and this situation.

History proves that consumers cannot rely on fair treatment of their complaints by lenders and dealerships.

And yet, in case after case, we’re watching FOS investigations drift into a familiar pattern of suggesting that the customer “chose” the product, the paperwork exists, therefore the sale must be fine. It’s déjà vu. This is PPI, but with a different badge on the forecourt.

The “new for old” reality: when GAP becomes redundant on day one

Let’s start with the practical issue that keeps getting missed by the inadequate initial investigation by FOS.

An overwhelming majority of new vehicles insured on fully comprehensive motor insurance are covered by “new for old” replacement in the first 12 months (sometimes longer, depending on insurer and policy terms). Put simply, if there is an accepted total loss claim against the policy the insurer replaces the vehicle with a brand new like-for-like equivalent rather than paying a depreciated cash value.

If that cover is in place, the central sales pitch that “your motor insurer won’t cover the full replacement cost” is demonstrably false. In plain English, the GAP policy is unsuitable on day one, and for a significant period of the period it is designed to cover.

We see this repeatedly:

  • A customer buys a new car.
  • The dealership sells GAP at the point of sale, often alongside finance.
  • The lender and/or dealership insists on the customer having fully comprehensive cover (and often requests evidence of cover).
  • The dealership chooses not to check whether “new for old” applies, for how long, or under what conditions.
  • The customer later discovers the GAP policy would not have added meaningful value during the first year.

That’s not a technicality. That’s a clear suitability issue.

“Demands & needs” isn’t a tick box exercise

When a dealership sells insurance, the obligation isn’t “make sure the form is signed”. The obligation is to take reasonable steps to ensure the policy is consistent with the customer’s demands and needs, and to provide a statement reflecting that.

A proper demands & needs process, in the context of a new vehicle and a GAP add-on, should include questions like:

  • Do you have fully comprehensive cover arranged?
  • Does your policy include “new for old” replacement? If so, for how long?
  • What’s your likely annual mileage and usage? (Some “new for old” terms vary.)
  • Is the vehicle financed? If yes, what are the settlement terms and deposit/negative equity position?
  • Does the term of the GAP product match the term of the finance agreement?
  • What type of GAP is being sold (RTI, VRI, finance GAP, return to invoice etc.), and what gap is it meant to fill in this customer’s situation?

In most dealership files, the pre-ticked “assessment” is essentially:

  • “Customer wants peace of mind.”
  • “Customer chose GAP.”
  • “Customer signed.”

That’s not a demands & needs assessment. It’s a sales narrative.

The uncomfortable parallel with PPI

The PPI scandal wasn’t only about one product. It was about a system and culture:

  • Add-ons sold at the moment of purchase – incentivised by commission (just as GAP is)
  • Pressure, bundling, and “it’s part of the deal”
  • Weak checks on suitability
  • Generic “needs” statements that could apply to anyone
  • Paperwork used as a shield instead of evidence of compliance

GAP sold at dealerships often follows the exact same behavioural script. It’s offered at the emotional peak of the buying journey when the customer is committed, financially stretched, and primed to protect the purchase. The pitch is simple.

And when complaints arise, the defence is also familiar; “they agreed”, “they signed”, “they could have read it”.

That’s exactly why demands & needs matter. It is the guardrail that stops the add-on machine from running on autopilot.

Why we’re “re-educating” FOS (and why that should worry everyone)

Let’s first be clear, we are the pioneers in GAP mis-selling claims and FOS is learning (slowly), but it only currently has one investigator looking into GAP complaints and he hasn’t got the required experience or understanding of these sales, nor the undeniable similarities to PPI.

The FOS is supposed to be the backstop, providing informal, fair, consumer-focused, and grounded in how financial services should work in practice, not just what a form says.

But in this area, we see worrying signs that institutional knowledge has faded, and fast. The turnover of employees at FOS has clearly resulted in a loss of experience of how PPI was sold, which in turn has resulted in poor investigations and a lack of understanding.

So we end up having to explain things that should be foundational:

  • A dealership can be an insurance intermediary, with regulatory duties.
  • Demands & needs is not satisfied by a generic statement (often pre-populated) detached from the customer’s circumstances.
  • A GAP sale is unsuitable if the customer’s primary motor policy already provides “new for old” replacement for the relevant period.
  • A GAP sale is unsuitable if the term of the cover does not match the term of the finance agreement.
  • The existence of documentation isn’t proof of a compliant sales process—especially when the documentation is boilerplate.

Even more concerning is the day-to-day quality issue with investigations that fail to request the relevant evidence. If the seller says “we did a demands & needs assessment”, the next step shouldn’t be to accept that at face value. The next step is to request it and obtain evidence to support it.

  • What questions were asked?
  • What answers were recorded?
  • What training and scripts were used?
  • What evidence was requested and obtained?
  • What product literature was provided at the time?
  • What exclusions and limitations were explained?
  • Was “new for old” discussed at all?
  • Was product term discussed at all?

If none of that exists, it’s not a minor gap in the file. It’s indicative of a mis-sale.

The minimum expectation of a competent FOS approach must be: ‘if the product may be redundant for a common and foreseeable reason (like “new for old” cover on a new car), the seller should have checked’.

Not as an optional extra. As part of a basic selling responsibly.

What we’re demanding from FOS

This isn’t about being anti-FOS, as much as it may appear. It’s about protecting the credibility of the system and ensuring consistency for consumers.

A better approach would look like this:

  • Treat dealership GAP as regulated distribution, not retail upselling.
    Investigations should reflect the responsibilities that come with selling insurance.
  • Make demands & needs evidence-based.
    If the seller can’t show what was asked and recorded, don’t assume it happened – look at PPI.
  • Handle “new for old” as a standard suitability checkpoint for new vehicles.
    If the seller didn’t check whether it applied, assume ‘new for old’ existed.
  • Ensure the policy matches the requirement.
    If the GAP term and finance agreement term is a mismatch, there is a clear suitability red flag.
  • Stop using signatures as a substitute for suitability.
    A signed document proves a sale occurred. It does not prove it was appropriate.
  • Raise the bar on investigator training and internal guidance.
    These cases shouldn’t depend on whether the consumer (or their representative) happens to educate the investigator.

The basic bottom line

This shouldn’t be a niche argument. It’s the basics of selling insurance fairly.

When a consumer buys a new car, and their comprehensive insurance is highly likely to include “new for old” in the first year, selling GAP without checking that reality is not a harmless oversight.

And when the consumer complains, they should not have to become the trainer in the room.

If the FOS has lost the muscle memory from the PPI era—about add-on sales, suitability, and the misuse of paperwork as a shield then we’ll keep doing what we’re doing by rebuilding that understanding case by case.

But we shouldn’t have to.

FOS GAP insurance demands and needs

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