Why the FCA Launched the Investigation
In January 2021, the Financial Conduct Authority (FCA) banned discretionary commission arrangements (DCAs) in motor finance. These arrangements allowed car dealers — acting as credit brokers — to set interest rates on customer finance deals and earn higher commissions for doing so. The FCA's concern was that this structure incentivised dealers to charge customers the highest rate possible, rather than a fair one.
Following an increase in consumer complaints after the ban, the FCA launched a formal investigation in January 2024 to determine whether the use of DCAs before 2021 caused widespread consumer harm and whether lenders should be required to provide compensation.
The 2024 Court of Appeal Ruling
In October 2024, the UK Court of Appeal issued a landmark ruling in the joined cases of Johnson v FirstRand and related motor finance cases. The court found that:
- Car dealers, when arranging finance, act as agents of the customer — not just the lender
- Dealers receiving undisclosed commissions from lenders may have breached their duty of loyalty to the customer
- Customers who were not told about commission arrangements may be entitled to have the entire commission repaid — not just any excess interest charged
This ruling is broader than the FCA's original investigation parameters and, if upheld by the Supreme Court, could significantly increase the total compensation owed to customers.
The Supreme Court Case
Following the Court of Appeal ruling, lenders — including Lloyds Banking Group (Black Horse's parent) and Close Brothers — appealed to the UK Supreme Court. The Supreme Court hearing is expected to take place in 2025, with a judgment anticipated by late 2025 or early 2026.
The Supreme Court's ruling will be critical in determining:
- Whether the "full commission" interpretation or a narrower "excess interest only" approach applies
- How far back claims can extend and whether limitation periods apply
- The total liability that lenders face across the industry
The FCA's Proposed Compensation Scheme
In October 2025, the FCA published a consultation paper proposing a formal industry-wide redress scheme for motor finance mis-selling. The key elements of the proposed scheme include:
- Automatic identification: Lenders would be required to proactively identify all customers whose finance was arranged under DCA and notify them
- Standardised calculation: A methodology for calculating compensation — likely based on the excess interest charged over the agreement term
- Consumer choice: Customers would be given the option to accept the calculated amount or escalate to the Financial Ombudsman Service for a higher assessment
- Timeline: Lenders would have a set period (likely 12–18 months from the final rules) to implement the scheme and make payments
When Will Payments Actually Be Made?
Based on the FCA's proposed timeline:
- Early 2026: FCA publishes final rules (pending Supreme Court outcome)
- Mid 2026: Lenders begin identifying affected customers and calculating compensation
- Late 2026 / early 2027: First compensation payments expected to reach customers
This is broadly consistent with the timeline of the PPI scandal, where the FCA published rules in 2011 but the first automated payments did not flow until 2012–2013. The motor finance scheme is expected to be more streamlined, but significant volumes and legal complexity will likely delay a fast resolution.
Which Lenders Are Most Exposed?
The lenders most frequently discussed in the context of the investigation include:
- Lloyds Banking Group (Black Horse Finance): One of the largest motor finance lenders in the UK. Lloyds has disclosed provisions in its financial accounts for potential motor finance liabilities.
- Close Brothers Group: Motor finance is a core part of Close Brothers' business. Its relative exposure (as a proportion of its total balance sheet) is considered among the highest of any listed lender.
- Santander UK: A major bank with significant consumer finance exposure.
- Barclays (Partner Finance): Operated DCA arrangements through its dealer partnerships.
- MotoNovo Finance: Specialist lender operating through independent dealers.
What Should Consumers Do Right Now?
Given the status of the investigation, there are several practical steps consumers should take:
- Register your potential claim now. Submitting your details with an authorised claims specialist positions you ahead of the expected wave of applications once the scheme formally opens.
- Gather your documents. Locate your original finance agreement if possible. If not, a claims specialist can retrieve it for you via a Subject Access Request.
- Avoid paying upfront fees. All legitimate claims management companies handling motor finance claims should operate on a no-win, no-fee basis.
- Be cautious of scams. As awareness of the investigation grows, fraudulent services are emerging. Only use FCA-authorised claims management companies.