Finance for motor vehicles: Despite the appearance of bank stability, doubts persist beneath the hood
UK Motor Finance Redress Scheme: Implications for the Industry and Banks
The Financial Conduct Authority (FCA) has proposed a motor finance redress scheme following a 2025 Supreme Court judgment, with potential far-reaching implications for the motor finance industry and the banks involved.
Key Implications:
- Financial Cost: The FCA estimates the total cost of the compensation scheme could range from £9 billion to £18 billion, with a more plausible midpoint estimate. Most individual claimants are likely to receive less than £950 per agreement, representing a substantial financial impact on lenders and brokers in the motor finance sector.
- Industry-wide Compensation: The scheme will compensate customers who were treated unfairly, particularly where commission arrangements were not properly disclosed. The FCA will consult on which other non-DCA commissions should be included and on eligibility thresholds for compensation.
- Regulatory Approach: The FCA will issue a consultation in early October 2025, open for six weeks, to finalize rules on assessing unfair relationships and determining compensation. Factors under consideration include non-disclosure of commission size and nature, tied commercial relationships, and customer sophistication.
- Market Integrity and Consumer Access: The FCA aims to balance redress payments with ensuring the ongoing availability of affordable motor finance. The consultation will consider harm caused to consumers and seek to design compensation that does not unduly disrupt credit availability.
- Impact on Banks and Firms: Banks and finance firms will have to reassess how they disclose commission arrangements and deal with complaints fairly and consistently under FCA oversight. The impending redress scheme may lead to increased compliance costs and operational adjustments.
- Consumer Awareness and Claims: Consumers who believe they were unfairly charged undisclosed commissions are encouraged to complain now. The FCA warns against using claims management companies, which can consume around 30% of compensation paid. Consumers who already complained do not need to take further action before the scheme is finalized.
Industry Consolidation and Banking Landscape: The ruling could kick the UK banking landscape's consolidation into a new gear, following on from the buyout bonanza across retail banks in the last year. Analysts predict more consolidation in the motor finance sector, with banking giants like Santander snapping up high street banks such as TSB. Moody's analysts previously stated that Close Brothers could be "taken over" if regulatory investigations into its motor finance business resulted in financial penalties that weakened its solvency.
Stock Market Impact: Analysts have upgraded Lloyds stock to 'Outperform', raising its target price 30% to 95p and believing in an upside scenario it could reach 110p – a 50% jump from their previous projection.
In summary, the motor finance redress scheme will impose substantial financial liabilities on lenders and affiliate banks, require enhanced compliance and disclosure practices, and reshape consumer redress mechanisms in the motor finance market. The FCA's consultation and subsequent scheme, expected to launch in 2026, will define the precise scope and cost, but the impact on the industry and banks will be considerable.
- The proposed motor finance redress scheme, estimated to cost £9 billion to £18 billion, may result in substantial financial impacts on lenders and brokers in the motor finance sector.
- The scheme will compensate customers who were treated unfairly due to non-properly disclosed commission arrangements, with the FCA considering additional non-DCA commissions for compensation.
- Banks and finance firms will need to reassess their commission disclosure practices and comply with FCA oversight to deal with complaints fairly and consistently.
- The impending redress scheme in the motor finance industry could potentially lead to increased consolidation within the sector, with banking giants like Santander acquiring high street banks.
