FCA confirms details of motor finance scheme

What does this mean?

Background

The FCA announced a review of discretionary commission arrangements (DCAs) (which were banned in 2021) in January 2024. 

On 1 August 2025, the Supreme Court found a lender acted unfairly - and therefore unlawfully - because of factors including: high, undisclosed commission paid to the broker; customer sophistication; and the failure to disclose a contractual tie (known as the Johnson case). 

The FCA confirmed on 3 August 2025 that it would proceed with a redress scheme. On 7 October 2025, the regulator consulted on details of the scheme, and published findings of its review. The review identified widespread shortcomings in how motor finance firms disclosed key arrangements including commission, particularly under DCAs.

Key changes to the policies consulted on

In response to industry feedback the FCA has made a number of changes to the design of the scheme in an attempt to make it more proportionate and operationally workable. 

Notably the FCA is proceeding with a two-scheme structure. The FCA will now operate one scheme covering agreements from 6 April 2007 to 31 March 2014 and a second covering agreements from 1 April 2014 to 1 November 2024. This is designed to better reflect differences in harm over time and seeks to reduce the legal and operational risks associated with a single scheme across this timeframe.

The FCA has also confirmed an implementation period. Firms will now have five months to prepare for Scheme 1 and three months for Scheme 2. The FCA first signalled this change in March 2026 before confirming it in the final PS.

The scope of the scheme has been narrowed. The FCA has introduced a de minimis commission threshold, meaning that agreements with low levels of commission will be excluded from the scheme. It has also introduced several exclusions, including for high-value loans, zero APR agreements, certain captive or white-label tied arrangements where the commercial relationship is sufficiently clear and DCAs where the discretion was not exercised and there was no loss to the customer. These changes are designed to focus the scheme on cases where there is a higher likelihood of consumer harm.

The treatment of tied arrangements has been refined. While tied arrangements remain within scope, they are now more clearly defined, and firms are able to rebut the presumption of unfairness in certain circumstances. In addition, some commercially transparent arrangements have been excluded altogether. This reflects feedback that not all tied arrangements result in harm.

The FCA has also made changes to the redress methodology. It has introduced caps on redress under the hybrid remedy and applied different assumptions for earlier and later agreements to reflect varying levels of harm. These changes are intended to ensure that outcomes are proportionate and more predictable. The FCA has also introduced a floor of 3% to the interest applied to redress payments and stated that consumers cannot challenge the rates applied.

A key operational shift is the move from an implied case-by-case assessment approach to a cohort-based model. Firms are now expected to group similar cases together and apply consistent decision-making across those cohorts. This allows firms to process cases at scale while maintaining consistency, although case-level exceptions and oversight will still be required.

The FCA has also simplified consumer communication requirements. Rather than contacting all customers, firms only need to contact; complainants, those with relevant arrangements (unless an exception applies) and consumers with relevant arrangement, who they have excluded because of civil limitation. Firms are also no longer required to use recorded delivery and are instead permitted to use more flexible and cost-effective communication methods, including digital channels.

The FCA has also clarified the approach where motor finance agreements were settled early, either through refinancing, voluntary termination, or full repayment before the contractual end date to ensure redress is based on what the customer actually paid. The FCA has also made the circumstances in which firms can rebut claims more clearly set out. 

In response to feedback, the FCA has revised several modelling assumptions in its cost-benefit analysis. It has reduced expected participation rates, lowered the estimated number of cases pursued in the counterfactual, and extended the assumed timeline for case resolution. The FCA states these changes result in more realistic estimates of costs and benefits.

What do firms need to do?

PS 26/3 provides the industry with much needed clarity on the way forward. Given the scale and complexity of the scheme, and short timeframes, firms should rapidly mobilise their delivery programmes. Key steps will include: 

Notification of use of implementation period. Within two weeks of the publication of the PS, firms are required to notify the FCA whether they intend to use the implementation period and must nominate a Senior Manager who will be accountable for oversight of the scheme.

Scheme Implementation Plan. Within six weeks of the publication of the PS firms must develop and submit a detailed Scheme Implementation Plan, setting out their approach to case assessment, the use of cohort or group-based decision-making, and the governance, controls, and quality assurance processes that will underpin delivery. Firms must also establish robust reporting and management information processes.

Scale operational capabilities. Build or enhance their end-to-end operational capabilities, including data extraction and cleansing, liability assessment processes, redress calculation engines, customer communication workflows, and case management systems.

Cohort-based operating model. Design and implement a cohort-based operating model, under which portfolios are segmented into groups of similar agreements and consistent, rules-based decision frameworks are applied, while ensuring that outcomes remain auditable and appropriately documented.

Interpretation of revised scope. Interpret and apply the scheme’s scope rules by implementing appropriate filters for de minimis thresholds, zero APR exclusions, high loan value exclusions, and tied arrangement carve-outs to reduce volumes and focus on cases where redress may be due.

Client communication strategy. Prepare a customer communication strategy that targets only eligible or potentially eligible consumers and uses appropriate channels, including digital methods, while ensuring compliance with Consumer Duty obligations and fraud prevention expectations.

Firms may choose to begin processing cases before the end of the implementation period if they are operationally ready, but must notify the FCA in advance and ensure that all aspects of the scheme can be delivered in full from that point.

Firms should also strengthen governance and assurance frameworks by establishing clear Senior Manager accountability, implementing robust quality assurance processes, and putting in place effective controls over cohort design, redress calculations, and customer outcomes.

Next steps

Firms wishing to take advantage of the implementation periods should notify the FCA within two weeks of publication of the PS and submit to the FCA a scheme implementation plan within six weeks.