The UK’s motor finance sector is currently undergoing its most significant regulatory transformation since the inception of the Financial Conduct Authority (FCA).
On March 30, 2026, the regulator published its final policy statement, PS26/3, confirming the implementation of an industry-wide consumer redress scheme designed to liquidate historical liabilities stemming from undisclosed commission arrangements.
This decision represents the culmination of a multi-year investigation into Discretionary Commission Arrangements (DCAs) and other commission structures that the FCA, and the courts, have deemed unfair to consumers. For financial services companies, the implications are profound, encompassing a projected £9.1 billion total cost and an operational requirement to reconstruct nearly two decades of transaction data. As firms prepare for the implementation periods starting in mid-2026, they face a landscape defined by extreme data complexity, the aggressive emergence of claims management companies, and a regulatory mandate to proactively reconnect with millions of "lost" customers.
The current crisis is not a sudden eruption but the result of institutional practices that were standard for decades. Between April 6, 2007, and the formal ban on DCAs in January 2021, the motor finance market operated under a model where the price of credit was frequently a variable determined at the point of sale by the car dealer acting as a credit broker. Under a Discretionary Commission Arrangement, the lender allowed the broker to adjust the interest rate (APR) offered to the customer within a specific range. Crucially, the broker’s commission was linked to the interest rate; the higher the rate the consumer agreed to pay, the larger the commission the broker received.
This structure created a fundamental conflict of interest. While the broker owed a duty to the customer, often interpreted by the courts as a fiduciary or near-fiduciary duty, the financial incentive was to maximize the cost of credit. The FCA’s initial review in April 2018 first raised concerns about these "bump" arrangements, suggesting they cost consumers £300 million annually. Despite the eventual ban in 2021, the legal fallout continued to escalate as consumers challenged the lack of transparency surrounding these payments. The transition of regulation from the Office of Fair Trading (OFT) to the FCA in 2014 marked a critical shift, as the regulator began applying more stringent Consumer Credit Sourcebook (CONC) rules, which mandated that firms pay due regard to the information needs of their clients.
Era
Primary Regulatory Body
Market Characteristics
Legal/Regulatory Status
2007 – 2014
Office of Fair Trading (OFT)
Wide use of DCAs; minimal disclosure of commission existence.
Regulated under Consumer Credit Act 1974.
2014 – 2021
Financial Conduct Authority (FCA)
Continued use of DCAs under CONC rules; disclosure required if "asked".
Introduction of "Treating Customers Fairly" (TCF) principles.
Jan 2021 – Oct 2024
FCA
Formal ban on DCAs implemented in January 2021.
Increasing litigation regarding non-DCA high commission.
Oct 2024 – Mar 2026
FCA
Court of Appeal rulings; FCA launches redress consultation (CP25/27).
Complaint handling pause for DCA and non-DCA cases.
April 2026 onwards
FCA
Final Redress Scheme (PS26/3) goes live; Scheme 1 and 2 implementation.
Shift to proactive remediation and forensic tracing.
The momentum for an industry-wide scheme was solidified by landmark judicial decisions, most notably the cases of Johnson v FirstRand Bank, Hopcraft, and Wrench. The Court of Appeal’s ruling in October 2024 sent shockwaves through the industry by establishing that a broker must obtain "informed consent" for a commission to be paid. This requires more than a vague statement that "a commission may be payable"; it necessitates the disclosure of the specific amount and the nature of the arrangement.
The Supreme Court’s subsequent considerations focused on the degree of fiduciary duty owed by car dealers to their customers. In cases where the dealer was seen as an agent of the customer, any undisclosed commission was viewed as a "bribe" or a "secret commission" in the eyes of the law, making the underlying credit agreement potentially voidable or giving rise to a claim for damages under the "unfair relationship" provisions of the Consumer Credit Act. The FCA’s redress scheme is essentially an attempt to provide a standardized, administrative alternative to what would otherwise be millions of individual court cases.
The final framework confirmed by the FCA in 2026 is uniquely structured to manage legal risk and operational feasibility. The most critical design choice was the split of the program into two distinct temporal schemes: Scheme 1 and Scheme 2.
Scheme 1 covers motor finance agreements entered into between April 6, 2007, and March 31, 2014. This period is controversial because it requires lenders to reach back nearly two decades, predating the current regulatory regime. Lenders have argued that the FCA lacks the power to mandate redress for this period, and a judicial review of this specific cohort is highly probable. To account for the extreme data gaps and potential legal challenges, the FCA has provided a longer implementation window for Scheme 1, with a deadline of August 31, 2026.
Scheme 2 applies to agreements taken out between April 1, 2014, and November 1, 2024. Because this period falls within the era of direct FCA regulation, records are generally more robust and compliant with modern data standards. The implementation period for Scheme 2 is more aggressive, set to conclude by June 30, 2026. By splitting the schemes, the FCA ensures that even if Scheme 1 is delayed or overturned by the courts, Scheme 2 can proceed, providing finality for the majority of claimants.
Eligibility for the scheme is not universal but is predicated on three specific triggers of "unfairness" where inadequate disclosure occurred :
However, the FCA has introduced several "safe harbors" to prevent the scheme from becoming a windfall for those who were treated fairly. Cases are excluded if the commission was "minimal" (£120 or less for pre-2014; £150 or less for post-2014) or if the borrower was charged 0% interest. Additionally, the scheme excludes "high-value loans," defined as those higher than 99.5% of other loans in that year, as these are considered bespoke rather than mass-market products.
Feature
Threshold / Condition
Redress Status
Commission Amount (Pre-2014)
>£120
Eligible (if undisclosed).
Commission Amount (Post-2014)
>£150
Eligible (if undisclosed).
High Commission (Scheme 1 & 2)
≥39% of credit cost AND ≥10% of loan
Eligible (if undisclosed).
Very High Commission (Johnson)
≥50% of credit cost AND ≥22.5% of loan
Eligible for Full Commission + Interest.
Loan Value
Top 0.5% of market
Excluded from mass-market scheme.
Interest Rate
0% APR
Excluded (Deemed Fair).
The FCA has devised two primary remedies to address different levels of harm. The Johnson Remedy is reserved for the most egregious cases, approximately 90,000 consumers who suffered from very high commissions and undisclosed ties. For this group, the remedy is a full return of all commission paid, plus interest, with no cap.
For the remaining 12 million agreements, the Hybrid Remedy applies. This calculates the average of two values: the commission paid to the broker and the estimated loss based on an "adjusted APR". To ensure consistency, the FCA has set standard APR adjustments based on historical market data. For Scheme 1, the adjustment is 21%, reflecting the higher rates and more significant discretionary "bumps" prevalent in that era. For Scheme 2, the adjustment is 17%.
To maintain fairness and avoid over-redress, the Hybrid Remedy is subject to three potential caps:
The FCA estimates that these caps will limit payouts in approximately one in three cases, ensuring consumers are not put in a better financial position than they would have been had they been treated fairly. All redress includes simple interest at the Bank of England base rate plus 1%, with a minimum floor of 3% for any given year.
As the motor finance industry pivots from legal analysis to operational execution, several critical failure points have emerged. The sheer scale of the historical look-back is the primary hurdle. Many lenders no longer hold the necessary data to identify which agreements involved a DCA or a high commission, especially for agreements that ended over a decade ago.
Lenders are required to proactively identify all eligible customers, but standard data retention policies (usually 6-7 years) mean that records for Scheme 1 (2007–2014) are often incomplete. The FCA expects firms to use "all reasonable steps" to fill these gaps, including requesting data from brokers (car dealers) who may no longer be in business or have changed owners. If a lender lacks the "actual payment schedule" (which accounts for early settlements or missed payments), they must use the "contractual payment schedule". This creates a high risk of calculation error and potential disputes with the Financial Ombudsman.
Unlike previous redress schemes that were largely reactive, PS26/3 places the onus on lenders to find and contact consumers who haven't yet complained. Within six months of the scheme's start, lenders must invite all identifiable "non-complainants" with a relevant arrangement to join the scheme. This is where companies are most likely to fall down. Regulatory non-compliance, specifically failing to take "reasonable steps" to find gone-away customers, could lead to further fines and forced extensions of the scheme.
The most daunting operational challenge identified by industry experts like UK Finance is the "Gone-Away" problem. Research indicates that up to 47% of consumers who took out motor finance in 2007 no longer live at the address held on file by the lender. For the scheme to be successful, lenders must bridge this gap.
Many firms are currently relying on standard automated tracing or simple credit bureau sweeps. These methods frequently fail because they rely on static data and cannot distinguish between a "dead" lead and a confirmed residency. In a redress environment, where millions of pounds are at stake, the cost of failed communication is high, not just in terms of administrative waste, but in the risk of legal non-compliance and the potential for fraud.
This is where forensic tracing, such as the services provided by Towerhall Solutions, becomes a strategic necessity. Towerhall’s "Forensic Tracing" goes beyond simple data matching, utilizing a "People First" approach through their Re-Engage system. This methodology combines digital forensics and deep-web analysis with Human Intelligence (HUMINT) to verify a subject's actual footprint. For lenders, this provides several critical advantages:
The financial fallout of the redress scheme has already begun to reshape the balance sheets of major UK institutions. Lloyds Banking Group and Close Brothers have set aside hundreds of millions of pounds, while Santander UK reported a total provision of £461 million as of early 2026. The Spanish parent company of Santander has been particularly vocal, branding the FCA’s approach as "overreach" and warning of the systemic impact on the car finance market.
Institution
Estimated Provision
Market Sentiment
Lloyds Banking Group
>£450 million
High exposure due to Black Horse brand; significant capital reserves.
Close Brothers
£320 million
Critical hit relative to market cap; exploring legal challenges.
Santander UK
£461 million
Publicly critical of FCA; warns of "unintended consequences" for automotive supply chain.
Total Industry Cost
£9.1 billion
Reduction from £11bn; viewed as "proportionate" by some industry stakeholders.
The Finance & Leasing Association (FLA) has warned that the "broad, blunt" nature of the redress scheme risks creating "windfalls" for consumers who didn't actually suffer loss, potentially diverting resources away from those genuinely harmed. However, the FCA maintains that the scheme is essential to provide "certainty and finality" to investors, allowing the industry to move past the commission scandal and support a healthy future market.
The motor finance redress scheme is the first major "test case" for the FCA's new Consumer Duty (Principle 12), which demands that firms act to deliver good outcomes for retail customers. This requires a proactive shift in firm culture. Compliance is no longer just about calculating a payout; it is about the "consumer journey".
The redress environment is a magnet for Claims Management Companies (CMCs) and opportunistic scammers. The FCA has formed a taskforce with the SRA and ICO to crack down on misleading advertising and meritless claims. Lenders must implement "standardized factsheets" and "unique reference numbers" in all communications to help customers distinguish legitimate redress offers from fraudulent ones.
Furthermore, the FCA has signaled a paternalistic stance, urging consumers not to use CMCs and stating that any claimant pursuing court action will be automatically excluded from the official, free-to-use scheme. For firms, the ability to find and contact customers first is the best defense against the aggressive fees and litigation-heavy approach of professional representatives.
Priority
Stakeholders
Core Action
Governance
Board, Senior Managers
Appoint SMF responsible for scheme oversight; submit implementation plan to FCA.
Data Extraction
IT, Operations
Initiate 19-year look-back; reconstruct payment schedules.
Outreach
Customer Support, Tracing
Deploy forensic tracing for "gone-away" cohorts; implement multi-channel communication.
Fraud/IDV
Compliance, Legal
Establish robust ID verification and Right Party Contact (RPC) protocols.
Reporting
Risk, Finance
Maintain real-time oversight and periodic reporting to FCA on progress and uptake.
The FCA’s redress decision is a watershed moment that will define the UK motor finance industry for the next decade. While the financial cost of £9.1 billion is a bitter pill for many lenders, the true test lies in the operational reconstruction of the past. Companies that "fall down" will do so not because of a lack of capital, but because of a failure to manage the complexities of data gaps and the challenges of the "Gone-Away" customer base.
By leveraging forensic tracing and intelligent re-engagement strategies, such as those pioneered by Towerhall Solutions, firms can bridge the 47% contact gap, fulfill their proactive duties under the Consumer Duty, and protect themselves against the dual threats of fraud and professional litigation. The transition from Scheme 1 and Scheme 2 represents a path toward "drawing a line under the failings of the past," but that line can only be drawn once every eligible consumer has been found, verified, and fairly compensated. For the motor industry, the message from the FCA is clear: the era of discretionary, undisclosed freedom is over; the era of proactive, data-driven transparency has begun.
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