UK Regulator Launches Proposal for £9 Billion to £18 Billion Motor Finance Compensation Scheme

3 August 2025

Cars travel along the M6 motorway near Knutsford, Britain, September 20, 2023. REUTERS/Phil Noble/File Photo/File Photo

On 3 August 2025 the UK’s Financial Conduct Authority unveiled plans to launch an industry‑wide redress scheme for consumers who may have paid to finance motor vehicles under unfair credit contracts that involved undisclosed commissions to car dealers. The regulator estimates that grants could fall anywhere between £9 billion and £18 billion according to its recent statement.

The move followed the Supreme Court’s 1 August ruling that rejected two of three earlier judgments which had placed broad liability on banks. That decision relieved lenders from an even larger compensation bill but affirmed that loans tied to undisclosed or discretionary broker commissions may still constitute unfair relationships. The FCA stressed that it will proceed with a redress programme based on those buyers affected by how dealers marked up their interest rates without proper disclosure.

Under the proposed redress framework the scheme would date as far back as 2007, and the regulator will outline design details in a formal consultation scheduled for early October. The consultation is intended to clarify factors such as which commission arrangements qualify, how to calculate interest on payouts, and whether consumers must opt in or be included automatically and allowed to opt out.

Although total cost remains uncertain the FCA emphasised that compensation grants are unlikely to average more than £950 per motor finance agreement and that overall expense is unlikely to fall materially below £9 billion. A mid‑range estimate of £11 billion to £12 billion is considered more plausible by analysts, though in extreme cases payouts could exceed.

Major lenders including Lloyds Banking Group, Close Brothers, Barclays, Santander UK and Bank of Ireland have together already provisioned nearly £2 billion in anticipation of compensation claims. Lloyds alone holds around £1.2 billion in reserves, while RBC analysts estimate the bank may ultimately face liabilities of approximately £1.6 billion all manageable under current buffer levels.

The size of the proposed pay‑out drew immediate investor attention. Shares in Lloyds rose by more than 7 percent on 4 August while Close Brothers jumped over 20 percent and Barclays added 2.3 percent. The move reflected relief that liabilities are now capped below previous estimates under the Court of Appeal judgement that had foreshadowed up to £44 billion in repayments broadly comparable in scale to the notorious PPI scandal.

Consumer advocates welcomed the regulator’s proactive stance, particularly in aiming to avoid repeating the drawn‑out chaos and political fallout triggered by the PPI mis‑selling saga. The FCA insists the new scheme will prioritise fairness, simplicity and timeliness while protecting market integrity by ensuring motor finance remains accessible going forward.

The consultation will also address how to define “unfair relationships” based on a matrix of factors including whether commissions were discretionary, how large they were, whether the borrower was sophisticated, and whether disclosures were sufficient. The goal is to foster consistent calculations and transparency across firms and claims.

In the wake of the announcement political reaction has been muted but cautious optimism permeates the media narrative. Some lawmakers view the scheme as a practical compromise between consumer redress and maintaining credit availability to drivers. Others warn that additional political backlash could emerge if estimated costs balloon or consumers find the programme difficult to navigate.

Industry voices stress that the scheme could mark a turning point in motor finance culture. Dealers were accused of using so‑called discretionary commission models to incentivise higher interest rate loans which enriched dealerships at the expense of consumers. Now those practices are under scrutiny and may constitute a structural reset towards clearer compliance and pricing transparency.

As plans unfold, analysts expect firms that tilt more towards motor finance to review strategy. Several specialist lenders have already trimmed dividends, and bank CEOs have indicated they will engage constructively in the FCA’s consultation. A surge in mergers or disposals among mid‑sized consumer finance arms is also possible as risk appetites shift.

For consumers the coming months could carry both relief and complexity. Anyone who bought a car on finance and suspects they paid excessive fees or undisclosed commission should review whether the FCA’s scheme might apply. Although complaints previously lodged will not expire automatically the process is expected to avoid reliance on claims management companies or legal advisers, which can reduce take-home compensation by up to 30 percent.

As a broad stroke, the FCA’s action demonstrates a fundamental recalibration. Banks are now facing redress without the weight of extreme liability, but must nonetheless treat borrower fairness as a central principle in future lending. Consumers may finally see restitution for mis‑sold policies, and the motor credit market may emerge more transparent.

If the scheme opens as expected in 2026 and delivers equitable payouts without complexity, it may close a chapter in British consumer finance scandal. For lenders, consumers and regulators alike the challenge ahead is to ensure rights are honoured and credit markets function openly once again.