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One of the headline changes is the decision to split the FCA redress scheme into two. This acknowledges the potential legal challenges for earlier motor finance agreements (scheme 1), while allowing firms to address complaints for more recent agreements (scheme 2).

What’s in scope?

In line with the consultation, the FCA is focused on motor finance agreements that it believes could be unfair due to poor disclosure of:

• a discretionary commission arrangement
• high commission (at least 39% of the total cost of credit and 10% of the loan)
• some tied relationships.

There are also notable exclusions to the FCA redress scheme. Two are cut and dry – agreements with zero commission; and low commission of no more than £120 (scheme 1) or £150 (scheme 2). The following three exclusions could be more challenging to demonstrate in practice:

• tied arrangements where the link between the manufacturer, lender and franchised dealer is clear 
• motor finance agreements containing a discretionary commission arrangement that didn't lead to higher commission
• if a lender can demonstrate that non-disclosure of in-scope features was fair and didn’t result in a consumer loss.

Calculating redress for motor finance

There are two remedies available. The Johnson/commission repayment method, which applies to cases of very high commission (at least 50% of the cost of credit, and 22.5% of cost of the loan) that also have an inadequately disclosed tie and/or a discretionary commission arrangement. These consumers will receive commission plus interest, with no redress cap.

For all other cases, there's the hybrid approach. This takes an average of the estimated loss (using an adjusted APR), and commission, plus interest. The APR adjustment is 21% for scheme 1, and 17% for scheme 2.

The hybrid method includes a redress cap, which is the lowest of: 90% commission plus interest; the adjusted total cost of credit; or the actual cost of credit. While the first cap option will be simple to calculate, the other two are tricky, due to the complex underlying calculations and limited data. 

Firms can make an early settlement offer to consumers, set at the level of any of these caps.

Data remains a key issue

To calculate motor finance redress, firms need to create market-adjusted payment schedules. Recognising the lack of available data, the final rules include three options, which aim to make the process fair and address early settlements. However, there will still be challenges in applying these to every situation and the FCA doesn’t have a fully standardised treatment to address mid-term events such as changes to loan terms, missed payments, or COVID-19 payment holidays.

Next steps

While the final rules bring greater clarity to the FCA redress scheme, implementing it won’t be easy. In addition to data challenges, most firms have built their redress calculators and need to update them to reflect the updated methodology. There are also short timelines, with implementation due by 30 June 2026 (scheme 2) and 31 August 2026 (scheme 1).

It’s also important to note key reporting deadlines including the two-week notification (by 13 April 2026) and several requirements at six weeks (by 11 May 2026) – notably, a one-off data request (including an attestation by a Senior Manager Function holder), a scheme implementation plan and the firm’s first forecast report.

Moving forward, firms will need to embed robust governance, controls and assurance to stay on track, and deliver good customer outcomes throughout the motor finance redress scheme.

Read more at FCA motor finance redress scheme – a guide to the final rules | Grant Thornton