Car Finance: The FCA’s proposed compensation scheme – what does it mean for dealers?

The FCA has announced it is to consult on an industry-wide scheme to compensate motor finance customers who are deemed to have been treated unfairly between 2007 and 2024.

The proposed scheme would allow eligible customers to claim compensation from lenders through an organised compensation scheme. As things stand, the scheme does not require dealers to pay compensation to customers.

The FCA expects the scheme to pay out £8.2 billion in total with an average compensation payment of £700.

How did we get here?

The Supreme Court’s recent decision in the Close Brothers appeal ([2025] UKSC 33) provided long-awaited clarity on the use of undisclosed dealer commissions in motor finance transactions.

The Court was considering appeals from customers who had purchased vehicles on finance from dealers, who had received commission payments from the finance companies.

The court considered if those arrangements amounted to bribery or gave rise to a claim arising from a duty owed by the dealer to the customer or if the payments were unfair for the purposes of consumer credit legislation.

In an outcome that was a huge relief for motor dealers it was decided that:

1. A dealer’s receipt of commission from a lender, even when not disclosed, does not amount to a bribe.
2. That the typical customer–dealer–lender arrangement does not give rise to a duty of single-minded loyalty owed by the dealer to the customer.

However, the Court left a route open to consumers to pursue claims against lenders by upholding one borrower’s claim that the finance arrangement was “unfair”.

It was not however, a blanket decision. The Court stressed that unfairness turns on all the circumstances of the individual case (such as the size of commission) and unfairness cannot be presumed from the non-disclosure of a commission alone.

FCA response

On the back of the Close Brothers decision and its earlier investigations into discretionary commission arrangements the FCA is now proposing a compensation scheme with the aim of customers being compensated in “an orderly, consistent, quick, and efficient way, while ensuring a well-functioning and competitive motor finance market”,

The proposed scheme will cover “unfair” arrangements taken out between 6 April 2007 and 1 November 2024.  Arrangements will be presumed to be “unfair” if they failed to disclose a discretionary commission arrangement or where the commission paid was “equal to or greater than 35% of the total cost of credit and 10% of the loan or where there were contractual ties which gave a lender exclusivity or a right of first refusal.

Lenders will have limited avenues to rebut the presumption of unfairness where:

1. There was adequate disclosure of the arrangement.
2. The arrangement was inadequately disclosed but it can be proved the customer was sufficiently sophisticated.
3. In a discretionary commission arrangement, it can be proven that the lowest interest rate product at which the dealer/broker would not make any additional commission was selected.

Given the average level of payment is expected to be £700 per agreement we do not expect lenders to devote time and resources to challenge payments except where there are clear circumstances to challenge.

Practical Implications for dealers

The main impact of the court’s decision is that the structure of the typical lender – dealer – customer arrangement is still viable. Existing commission structures are likely to remain largely intact.

Lenders will be reviewing their arrangements carefully especially where commissions might be considered unusually high or otherwise “unfair”. This could impact the availability of credit, the terms on which credit is offered, and the levels of commission lenders are prepared to offer dealers.

The FCA’s proposed scheme provides for lenders, not dealers, to compensate customers.

However, dealers should still be live to the potential for lenders to seek to recover sums from them where they allege, for example, that dealer failure to adequately disclose details of the commission arrangement has led directly to the lender’s liability to the customer.

What next?

The Supreme Court’s decision has seemingly, for now at least, had the effect of striking a pragmatic balance. It upholds commercial certainty for dealers and lenders while preserving consumer protection against genuinely unfair finance arrangements.

The FCA’s consultation on the proposed scheme closes on 18 November 2025. If all goes as the FCA plans expect final details of the scheme early in 2026.

To discuss this matter, get in touch with the disputes team here.