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The Financial Conduct Authority’s (FCA) long-anticipated motor finance redress scheme is, frankly, pleasing no one. I believe the majority of consumers affected by mis-sold car finance will think it doesn’t go far enough, while the lenders and banks behind those finance schemes will feel that it goes too far, writes Fraser Brown, Managing Director of MotorVise.
The regulator’s proposal covers up to 14 million finance agreements made between 2007 and 2024, with average compensation expected to be around £700 per agreement, down from earlier estimates of nearly £950. The FCA says it wants to bring clarity and closure to the issue of historic motor finance mis-selling. Yet rather than drawing a line under the matter, its proposal risks deepening the sense of frustration and mistrust across the industry.
Consumers mis-sold motor finance now face a difficult choice: join the FCA’s official redress scheme or take their chances through the courts. I believe the majority will assume they can secure a higher payout by pursuing legal action, encouraged by claims management firms, the so-called ‘ambulance chasers’.
Once legal fees are deducted, however, many could receive less than under the FCA’s scheme. Despite that reality, I expect to see a wave of protracted court cases as a significant proportion of motorists bypass the FCA’s process altogether.
Even the FCA admits its redress scheme is unlikely to start until early next year, meaning many payouts won’t land until well into 2026. Those who choose to litigate could be left waiting far longer. Whichever route is taken, the process will be protracted – and that delay will have a ripple effect throughout the automotive retail sector, prolonging uncertainty for consumers, lenders and dealers alike.
Dealers, meanwhile, will be hoping that the finance houses will shoulder the cost of compensation rather than seeking to recover it from them. If that proves the case, there could be a modest upside when payments eventually begin, as consumers with extra cash in their pockets may choose to spend it on a car upgrade. That spending could inject some much-needed confidence into a market that remains fragile.
However, if lenders decide to claw back part of their losses from dealers, some smaller retailers could face serious financial strain, and some may close. While I don’t believe this is a realistic outcome, it’s possible, and it would be devastating for those caught in the crossfire. Such a liability could wipe out the thin margins on which many smaller independents operate.
It’s also worth remembering that many dealers operated entirely within the frameworks and commission structures set by lenders. In numerous cases, they had limited visibility of the financial mechanisms now deemed unfair. If lenders attempt to recover compensation costs from these businesses, it would not only be unjust but could erode what trust remains between dealers and finance providers.
The longer this situation drags on, the greater the damage to confidence in the motor finance market. Some lenders are already expressing caution, while others may conclude that the regulatory risk outweighs the reward. If even a handful of major finance providers withdraw or scale back, the result will be reduced competition, fewer options for consumers, and tighter lending criteria. That outcome benefits no one.
Motor finance underpins the majority of new and used car transactions in the UK. Around 80 per cent of new cars are sold using some form of finance, so any contraction in availability or choice will have serious consequences for both consumers and the wider retail network. At a time when the sector is already grappling with supply challenges, inflationary pressures, and the transition to electric vehicles, the last thing it needs is additional instability created by uncertainty over regulation and liability.
The FCA set out to design a fair, consistent approach that would finally bring closure to the issue of mis-sold car finance. But in trying to strike a balance between protecting consumers and holding lenders accountable, it risks satisfying neither. Consumers will feel short-changed, lenders will feel over-penalised and claims management companies will smell an opportunity. Meanwhile, dealers will be left wondering whether they might yet be drawn into the firing line.
The regulator’s stated goal is to bring certainty back to the market, but certainty will only come when the process is transparent, the timescale credible, and financial responsibilities clearly defined. At present, none of that is in place. Unless the FCA moves quickly to restore confidence and deliver genuine clarity, the industry faces years of legal wrangling, delay, and disruption – and that’s bad for all involved.