How the FCA Turned Motor Finance Redress Into Damage Limitation

There’s a moment in most national scandals when you start to realise the system isn’t trying to fix the problem, it’s trying to manage the fallout. In the UK’s motor finance commission scandal, that is happening now.

The Financial Conduct Authority (FCA) has publicly acknowledged that “many firms broke its rules” and didn’t properly tell customers about commission arrangements, subsequently deemed unlawful by the Supreme Court. Yet what’s emerging is not a full-throttled attempt to put consumers back where they would have been without the unlawful misconduct. What’s emerging is a damage-limitation exercise dressed up as a redress scheme.

And it is no coincidence that this is happening since 2023, when Parliament handed the FCA a responsiblity to boost competitiveness and growth.

But when you hand a consumer protection regulator a “growth” mandate, you are handing responsibility to people who have no experience or expertise in how to boost any economy.

More concerning, you create an immediate conflict of interest.

The uncomfortable truth about the FCA’s “growth” mandate

To be fair, it is impossible for the FCA to keep all sides happy.

However, what has happened is that lobbying from the banking sector has rocketed, seeking to take advantage of an organisation that has been handed an impossible task of boosting growth with little know-how.

The FCA has listened to and been led by the banking sector as an industry that purports to know how to boost growth and competition (financial crash anyone?).

The result is a regulator that puts the wishes of those it regulates above those it is responsible for protecting.

If you want to know whether that tension is real, look at the motor finance redress proposal and ask a basic question:

Does it feel like an uncompromising consumer protection response, or a calibrated settlement designed to avoid spooking the lenders?

Motor finance – from “you paid too much” to “be grateful you get anything”

The FCA’s own historical work (prior to 2023) on motor finance didn’t mince words about consumer harm.

When it eventually moved to ban discretionary commission arrangements (DCAs) — arrangements that incentivised brokers to hike interest rates to earn more commission — it highlighted the scale of detriment. In its impact assessment, the FCA estimated that on a typical £10,000 motor finance agreement, higher dealership commission under one form of DCA can result in the customer paying around £1,100 more in interest charges over a four-year term.

That was the regulator’s own maths.

Fast-forward to today (post 2023!), and the FCA’s ‘proposed’ compensation scheme now talks in terms of an average payout of £700 per agreement, and that figure includes compensatory interest.

Read that again.

• FCA’s own prior analysis: £1,100 extra interest paid by consumers on a typical deal (in at least one DCA model), not including compensatory interest.
• FCA’s current scheme comms: £700 average compensation including compensatory interest.

That’s not a mathematical error, that’s a policy choice.

And it’s not happening in a vacuum. The FCA’s redress proposals openly admit that because the scheme must be workable at scale, “not everyone will get everything they would like from a scheme”. Conveniently, the people least likely to “get everything they would like” are the people who were overcharged.

Coincidence? Let that sink in.

Interest is where the real haircut happens

You can tell how serious a redress scheme is by how it treats time, because time is money.

Historically, the Financial Ombudsman Service (FOS) applied a standard 8% simple interest rate on compensation awards. It was part of ensuring consumers weren’t left worse off simply because companies unfairly held their money for years, and it acted as a small deterrent against mis-selling.

Now look at where we are:

1) The FCA’s proposed scheme interest rate is “Bank of England base rate + 1%”.

The FCA’s own consumer information says that under its current proposals, compensation would include interest calculated as the average base rate per year, plus 1%, from the date of overpayment to the date compensation is paid.

By way of reference, the Supreme Court ordered “interest at a commercial rate”, widely accepted in that particular case to be circa 7%.

2) The FOS changed its own interest approach from 1st January 2026.

The FOS has published a policy statement confirming it has also moved away from the historic 8% standard and instead applies a time-weighted average of Bank of England base rate + 1 percentage point for “pre-determination” interest.

So the FCA designs a redress scheme with base+1 interest… and the ombudsman shifts to base+1 interest.

If you don’t see the pattern, you’re not looking hard enough.

This isn’t neutral modernisation. It is a system-wide recalibration downward, exactly in the direction that reduces liability for firms and reduces recovery for consumers.

Adding friction, the introduction of fees for representatives

If you want fewer complaints, not by solving misconduct but by reducing the number of people able to pursue it, you don’t need to ban complaints. You just need to make complaining more difficult.

That’s exactly what has happened with professional representation at the FOS.

From 1st April 2025, case fees are charged where a complaint is referred by a professional representative and exceeds the annual free-case allowance.

The Financial Times reported that after the fee was introduced, complaints volumes fell, largely because fewer cases were being submitted by professional representatives, and noted concerns from consumer advocates that the fees may limit access.

This is the crucial point, fees change behaviour. They always do. And when behaviour changes, the people who suffer are the least confident, least resourced, and most vulnerable, the ones least able to navigate firms, deadlines, evidence requests, and legal threats on their own.

And it’s especially concerning because the “common sense” alternative was staring everyone in the face:

If you want to deter weak cases charge the losing party. Yes, it is that simple.

Abby Thomas, the FOS leadership crisis, and what it says about the “ecosystem”

The Financial Ombudsman Service isn’t operating in calm waters, it rarely does. It’s been in leadership turmoil and Parliament has been forced to drag information out of it.

Abby Thomas’s departure as FOS Chief Executive/Chief Ombudsman was announced on 6th February 2025. The House of Commons Treasury Committee later concluded, based on documents it reviewed that the FOS board dismissed her after “fundamental disagreements” and a “collapse in confidence”. MPs also criticised the chair’s conduct during scrutiny and stressed the need for proper accountability.

You don’t have to invent conspiracies to see what this suggests.

Common sense lost out to implementing a deterrent to complaints, and anybody that stood in the way was maneuvered.

PPI proved redress is restorative and economically meaningful

The FCA and the general public have constantly been fed the line that strong (fair) redress harms the economy. That paying consumers back is a “drag”, and would reduce competition and access to borrowing.

Yet the FCA’s own data shows that banks paid £38.3 billion in PPI refunds and compensation (a sum widely described as the largest UK consumer redress exercise).

Did the country collapse because households got money back they should never have been charged in the first place?

No. People used it to clear debts, stabilise their finances, pay for essentials and, yes, spend.

In an era where cost-of-living pressures have battered households’ incomes and security, returning money to people who were unfairly charged isn’t just “compensation”. It’s repair.

And repair is not anti-growth. It’s pro-household resilience.

The backfire is predictable, watered-down redress fuels litigation

Here’s the part the FCA and FOS seem determined not to learn from history… when people believe the “official” route won’t deliver fair outcomes, they don’t politely accept it. They reject it and seek alternatives.

The FCA has suggested it wants an orderly scheme, but the proposed scheme is now so heavily weighted against justice that it will end up creating the opposite.

The scheme will be ignored, and the courts will be deluged with claims as the only reliable route to fair redress.

What this should have been

A regulator that truly believed in consumer protection (and wasn’t conflicted) would do three things, unapologetically:

1. Pay back the full economic harm, not a “reasonable simplification” that happens to land below earlier estimates of detriment.
2. Use an interest approach that reflects real deprivation and deterrence, not a conveniently low benchmark that aligns with a pro-industry “orderly” outcome.
3. Design the complaints ecosystem around access, not around friction, and apply a “loser pays” principle rather than taxing representation.

Instead, we’ve been sold a story that growth requires quiet compromises; that fairness is negotiable; that victims should accept a reduced payout and move on.

Shame isn’t too strong a word

The government chose to add “growth” into the FCA’s mandate. The FCA chose to interpret “orderly” redress in a way that repeatedly softens the outcome for firms. Both the FCA and FOS have shifted interest in a direction that will reduce what consumers receive, while also introducing fees that change who can bring cases and how.

All of this may be presented as modernisation. But to millions of people who paid more than they should have, and who were not properly told why, it looks like a system protecting itself and seeking the approval of government for the responsibility handed to it.

Shame on the government for creating the conflict. And shame on the FCA and FOS for exploiting it, or worse, for pretending it isn’t there.