Troubled Waters For The FCA’s Consumer Redress Scheme

Following the Supreme Court’s decision in Hopcraft v Close Brothers Limited [2025] UKSC 33—which held that car dealers and finance companies could not be liable in tort for undisclosed commissions, though the lenders may be liable where the commission arrangements created an unfair relationship with their customers within the meaning of s.140A of the Consumer Credit Act 1974 (“CCA 74”)—the Financial Conduct Authority (“FCA”) published its Redress Scheme on 30 March 2026, designed to offer an alternative route to compensation for would-be claimants wishing to bring CCA 74 claims.  The Scheme applies to regulated motor finance agreements created between 6 April 2007 and 1 November 2024.

In accordance with the terms of the Scheme, lenders must presume that there was an unfair relationship within the meaning of s.140A of the CCA 74 where (i) there was a ‘relevant arrangement’ and (ii) inadequate disclosure was given of that arrangement.  The three types of relevant arrangement are broadly: (a) discretionary commission arrangements, (b) high commission arrangements, and (c) tied arrangements.  The Scheme creates a presumption of inadequate disclosure unless disclosure is supported by documentary evidence, with the lenders bearing the burden of proof to show that disclosure took place in any given matter.

The presumption of unfairness, and so of loss and damage, can be rebutted where the lender can show that the consumer could not have obtained a lower APR from another lender with which the broker was in a referral arrangement.  There are also a certain (albeit limited) number of exceptions, including for commissions below a given threshold; agreements where the APR was 0%; and where, under a discretionary arrangement, the level of commission actually chosen was the lowest on the spectrum which that arrangement permitted.  Interest on compensation is paid at Bank of England base rate plus 1% each year, and is subject to a minimum amount of 3% in any given year.

Legal challenges to the Scheme were swiftly launched by one consumer representative group, Consumer Voice, and three different lenders.  Consumer Voice makes a number of arguments, all of which in essence seek to persuade the Upper Tribunal that the Scheme is insufficiently consumer friendly.  The lenders challenge the lawfulness of the Scheme on a variety bases, including that it requires finance companies to assume the existence of an unfair relationship in circumstances which none existed, and generally that redress is required under the Scheme where no there is no proper connection between the loss or damage suffered by the consumer (if any) and the compensation to which they are entitled.

The Upper tribunal is due to hear these legal challenges in either December 2026 or January 2027.  In June this year, following a case management conference in the litigation, the Tribunal made an interim order suspending parts of the Scheme.  The effect of the suspension is that firms are not presently required to calculate or pay redress, or to send communications to parties about compensation owed under the Scheme.  However, the parts of the Scheme which remain operational still require lenders to take various steps, including:

1. Identifying relevant complaints and agreements.
2. Gathering data necessary to identify commission arrangements and disclosure practices, which includes gathering information held by third-party brokers.
3. Those brokers in turn are obliged to provide the requested documents and information, or confirm that they do not hold it, within one month of a request being made.
4. Respond to most complainants who are not owed compensation under the Scheme, the aim being to inform those who will not benefit from the Scheme sooner rather than later.

The final outcome of the challenges remains to be seen.  But the FCA has said that if the Scheme (or parts of it) were to be found unlawful and so quashed, it would need to consider all of its options.  Drafting an entirely new scheme from scratch would take up significant time, and any new iteration would be likely to face fresh legal challenges.  The FCA has therefore explicitly said that there may be no scheme at all, if the present one falls away.

In that event, the FCA has warned that lenders need to be “operationally and financially ready for a complaint-led and supervisory approach to resolve historical liabilities, in line with the default statutory timelines”.  It has also said that lenders should make all necessary provisions, including as to setting aside appropriate levels of capital and liquidity, and engagement with their auditors, to meet that possibility.  The FCA is also liaising with the Financial Ombudsman Service, to ensure it is ready for the likely uptick in cases if the present Scheme is set aside and consumers are unhappy with the outcome of their lender’s complaints process.

Comment

The Tribunal’s decision will not likely be published for some months into 2027.  If the Scheme is upheld (and there is no appeal), then payments are likely to start in 2027.  If, however, the Scheme or part of it falls away, then the FCA will need to decide how to proceed.

It has said that the operation of a redress scheme is likely to be the quickest and simplest route for claims to be processed.  However, it is crucial that lenders prepare now for the prospect that, should the Scheme be set aside, the FCA will instead decide place the burden on them to deal with complaints individually under their own complaints processes.  A lender would only have eight weeks to do so in any given case, and so the administrative burden could be extreme.  All of this is set against the background of the very real question about whether compensation should be due to such consumers at all.

The FCA and Solicitors Regulation Authority have in parallel been seeking to tackle unscrupulous conduct by both claims management companies and law firms in relation to the generation and handling of motor finance litigation.  In all, many hundreds of misleading adverts concerning car finance claims have been removed or amended in recent months.  The Advertising Standards Authority has also launched various investigations into these adverts, which seeks to scrutinise various matters such as clarity regarding the fees charged by law firms for such cases, and exaggerations in the amount of compensation which may potentially be recovered by would-be litigants.

While this may offer some small comfort to lenders, it is clear that they must now set aside considerable operational and financial resources in the coming months both to deal with the prospect that the Scheme may be upheld and claims under it commenced but, equally, the possibility that it may be replaced with a requirement that each must process and determine their own complaints internally, and thereafter address onward referrals to the Ombudsman.  The message is therefore very much: act now.

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