The City watchdog wrapped up the consultation on its motor finance redress in December but the two-year long scandal threatens to rumble on into the new year.
The Financial Conduct Authority (FCA) pushed the deadline for feedback on its scheme to 12 December after it was originally pencilled in for 18 November.
The delay came after an uprising from City banks who blasted the scheme, but it was also met with similar furore from the consumer side, which accused the regulator of favouring lenders.
In a session with the Treasury Select Committee in December, the FCA’s chief Nikhil Rathi called for either side of the saga to help “find a solution”.
“One way or another, we have to figure this out,” Rathi said.
With the full outline of the scheme expected early 2026 and consumer groups already warning of further legal battles, the FCA faces an uphill battle to find common ground.
The regulator
The FCA first laid out the plans for its redress scheme relating to discretionary commission arrangements – ‘secret’ deals between car brokers and banks – on 7 October, which expected to put lenders on the hook for £11bn.
This fell at the lower end of previous estimates and curbed a £40bn hit feared by City analysts prior to the Supreme Court’s August ruling.
The UK’s top court handed banks a lukewarm win, upholding two out of three appeals, but left the door open for the FCA’s redress on the grounds of “unfairness”.
The regulator estimated consumers would receive around £700 per agreement, on average.
This was viewed as a general win for the banks, with shares soaring in the following trading session.
When pressed on whether firms were pushing back amid the redress, Rathi said there has been a “range of co-operation” across lenders and claim management companies.
The banks
As the City digested the first details of the redress scheme, banks came out of the gate swinging.
Lloyds Banking Group – which owns the UK’s largest motor finance lender Black Horse – was the first to raise provisions to £2bn from £1.2bn.
FTSE 250 lender Close Brothers followed suit near-doubling its funds set aside to £300m and Barclays almost quadrupled its provisions to £325m.
Santander’s UK arm scrapped its third-quarter results at the end of October amid the uncertainty caused by regulatory redress.
The lenders all took aim at the regulator for a “disproportionate” redress scheme, which they claimed did not reflect the legal clarity brought forward by the court.
The top Court ruled in favour of one of three claimants after finding their outsize commission of 55 per cent was “unfair”.
However, the FCA has said the threshold for its redress – where 14.2m agreements are estimated to be eligible – will be 35 per cent.
The consumer
But on the consumer front, equal backlash has been mounting.
The All-Party Parliamentary Group (APPG) on Fair Banking blasted the City watchdog for a “£4.4bn gap” in the proposed scheme.
The group accused the regulator of being “influenced by the profit margins of the lenders”.
Criticism from the APPG centred on the FCA’s compensatory interest rate for mis-sold loans, which the group said ”has done more than any other facet of the scheme to favour the industry”.
City analysts expect Johnson – the one claimant successful in the Supreme Court battle – to have received near seven per cent interest on his compensation packet.
The FCA proposed a rate of 2.09 per cent for its scheme.
Fresh data from Consumer Voice in December handed motor finance lenders a stark warning over a potential influx of legal battles if the UK’s financial watchdog fails to “genuinely compensate” consumers.
Nearly 50 per cent of consumers said they would require at least £2,000 more than the £700 per agreement originally proposed by the watchdog.
The government
Prior to the Court ruling, Chancellor Rachel Reeves had attempted to intervene in the saga over fears a hit to the banking sector could dampen UK investment.
Days prior to the verdict, reports emerged that Reeves was weighing overruling the Supreme Court, should it hand an adverse ruling to lenders.
After Santander kicked its results to the curb, the group’s UK boss said material changes to the FCA’s redress should be “an active consideration” for the government.
He warned if the government does not intervene “the unintended consequences for the car finance market, the supply of credit and the resulting negative impact on the automotive industry and its supply chain could significantly impact jobs, growth and the broader UK economy.”
BMW – which has set aside £200m in provisions for the scandal – was also reported to be seeking a meeting with the Chancellor to discuss the impact of the FCA’s redress scheme.
The firm warned it faced potential cuts to luxury car provision in the Motability scheme, impact on sales and industry-wide concerns about regulatory changes under Labour.
The Chancellor is understood to have a close relationship with UK banks, even sparing them a tax raid in her first two Budgets despite fierce lobbying.
But time will only tell if the government’s hand is forced in the motor finance showdown as the FCA desperately tries to find some solution to the two-year long saga.