Legal Clarity, Regulatory Complexity: The Motor Finance Challenge

Author: Priscilla Gaudoin - Head of Risk & Compliance - published August 2025

Topics: Regulatory Change, Conflicts of Interest, Complaints Management

Regions and Regulators: UK - FCA

The Supreme Court ruled that certain commission arrangements between car dealers and lenders created an unfair relationship under Section 140A of the Consumer Credit Act 1974.

This followed years of complaints about discretionary commission arrangements (DCAs), where brokers could adjust interest rates to increase their commission.

The UK motor finance sector is undergoing one of its most significant shake-ups in decades.   Following the Supreme Court’s Hopcraft judgement in August 2025, which clarified that non-disclosure of certain commission arrangements can amount to an ‘unfair relationship’ under the Consumer Credit Act, the Financial Conduct authority (FCA) announced plans to consult on an industry-wide redress scheme. With potential liabilities estimated between £9 billion and £18 billion, this development carries major implications for lenders, brokers, and the wider consumer credit market.

Why the review matters:

For years, many motor finance agreements included DCAs, which allowed brokers to adjust customer interest rates and, in turn, increase their commission. In practice, this often led to higher borrowing costs for consumers, who were unaware of the incentives driving the broker’s recommendation.    The Supreme Court confirmed that when such commissions were undisclosed or excessive, consumers may have been treated unfairly.

The FCA has moved swiftly to response, recognising the need to restore consumer confidence and protect the integrity of the market. The proposed redress scheme is designed to offer a comprehensive, fair and efficient mechanism for compensating customers without the drawn-out litigation battles that characterised previous scandals like PPI.

Key Takeaways from the FCA’s Proposals:

The FCA’s consultation, due to launch in October 2025, will focus initially on agreements with DCAs but may extend to certain non-discretionary arrangements where a lack of disclosure also created consumer harm. The scope will cover loans dating back to 2007, bringing nearly two decades of agreements into play.

Compensation is expected to consist of a repayment of the commission received, plus simple interest, likely set at a base rate plus 1%, around 3% per annum. Importantly, the FCA has signalled it will consider a de minimis threshold, as well as whether consumers should be automatically included (opt-out) or must register (opt-in). Each of these design decisions could significantly influence the size and speed of payouts.

Estimates suggest that most consumers will receive less than £950 per agreement, but the aggregate impact on lenders remains substantial. Major banks including Lloyds, Barclays, and Santander have already set aside provisions totally nearly £2 billion.

Immediate Priorities for Firms:

In the short term, motor finance providers must prioritise data readiness. Many agreements stretch back more than 15 years, and the ability to identify which contracts involved discretionary commissions, and how those commissions were calculated, will be essential. Without clean, well-structured historical records, firms risk miscalculating redress or being unable to respond effectively to regulatory deadlines. Firms should reassess potential liabilities and allocate funds in anticipation of redress.

Figure 1: Immediate priorities

Equally important is customer communication. The FCA has warned of a surge in scams and fraud attempts, with criminals impersonating lenders or compensation services. Firms should therefore take proactive steps to reassure customers, explain the regulatory process clearly, and discourage them from engaging with third-party claims management companies that could deduct large fees from their compensation.

Finally, firms should engage constructively, with the FCA’s consultation. Decisions on whether the scheme operates on an opt-in or opt-out basis, the appropriate treatment of ‘high’ commission rates, and how redress calculations are standardised will all shape the scale of liabilities.

Long-term Adjustments Needed:

Beyond the immediate operational challenges, the review raises deeper questions about how motor finance should be structured in the future. Firms will need to re-examine commission models to ensure they are transparent and free of conflicts of interest. Fixed fee or flat-rate commission structures may become the industry norm, reducing the risk of misaligned incentives.

Figure 2: Long-term adjustments

Stronger disclosure practices will also be essential. Regulators are increasingly intolerant of opaque or overly complex consumer contracts, and firms that fail to present clear, understandable information risk further scrutiny. Embedding a culture of consumer fairness backed by governance frameworks and regular compliance testing, will help firms demonstrate alignment with the FCA’s expectations.

The industry must also learn from the PPI mis-selling scandal. That episode not only cost financial industry over £38 billion but also severely damaged public trust.   Avoiding a repeat means investing in robust systems for record keeping, complaint handling, and proactive remediation.

The Regulator’s Concerns:

From the FCA’s perspective, the review is about more than consumer redress. The regulator wants to ensure that the motor finance market remains functional and competitive even as large-scale compensation is paid out. It is also focused on market integrity, warning firms not to engage in protracted disputes over liability, which could delay compensation and undermine trust in the scheme.

Consumer protection is another central concern. With fraudsters already exploiting the publicity around compensation, the FCA is working to educate consumers and clamp down on misleading claims. It has also urged customers to avoid claims management companies, ensuring that compensation goes directly to those entitled rather than being eroded by third-party fees.

"Our detailed review of the past use of motor finance has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers. Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way.” – Nikhil Rathi, FCA Chief Executive

Perhaps most importantly, the regulator has signalled that it expects firms to take responsibility for preventing future systemic failures. As the FCA’s chief executive, Nikhil Rathi, has made clear, the financial sector must avoid repeating cycles of mass redress that damage both consumers and the credibility to the UK’s regulatory framework.

What next?

The UK motor finance consultation is not simply a one-off redress exercise; it represents a turning point for the industry. Firms must balance the short-term operational challenge of delivering billions in compensation with the long-term tasks of rebuilding trust through transparency and fairness.

For consumers, the scheme offers long-overdue recognition of the harm caused by hidden commission arrangements.   For regulators, it is a test of whether the financial sector has truly learned from past scandals. The coming months will be critical as the consultation takes shape, and the industry must be ready to act decisively both now and, in the years, ahead.

How Ruleguard can help:

Ruleguard is an industry-leading GRC platform designed to help regulated firms manage the burden of evidencing and monitoring compliance. It has a range of tools to help firms fulfil their obligations across the UK, Europe and APAC regions.

With Ruleguard, firms can manage regulatory risks by:

• Building robust governance frameworks and internal checks to prevent misconduct 
• Reviewing, approving & tracking financial promotions and client communications
• Streamlining complaints management processes
• Documenting and reporting on control failures & deficiencies whilst identifying issues and scheduling remediation tasks
• Providing auditors and regulatory authorities with secure access to compliance and assurance documentation.

Ruleguard's Consumer Duty Solutions enable firms to automate processes, create and maintain the crucial evidence trail, whilst also sharing information with third parties to provide more robust oversight and manage regulatory risk. 

Ruleguard is a comprehensive solution that lets you protect and propel your business forward through the complex regulatory landscape.

Related Webinars, White Papers and Blogs

Ruleguard hosts regular events on various regulatory topics. You can watch our webinars on-demand at your convenience, or read our blogs, white papers, infographics, and tune in to our podcasts.

• Webinar July 25 | Duty Bound: The UK Consumer Mandate in a Global Age
• Understand the impact and implementation of the UK’s Consumer Duty
• Signing off financial promotions with finesse
• Financial Promotions: Gateway to Success | Ruleguard Webinar
• Navigating Complaints in a Changing Financial World
• Control Your Conflicts: Strategies for Transparency & Integrity | Ruleguard Webinar
• Why Managing Conflicts should still be on your agenda!
• Improve Complaints Management and Improve Compliance | Ruleguard

Championing consumer interests

About the author

In a career spanning 30 years, Priscilla has worked as a consultant, CCO and MLRO providing regulatory oversight and advice to firms across the financial services industry. She is responsible for our thought leadership programme, writing regular articles and white papers, and hosting webinars on a variety of regulatory matters.

She is a Fellow of the International Compliance Association, a certified GRC practitioner, and a member of the Institute of Risk Management.

 

Contact Priscilla