The Finance & Leasing Association is urging regulators to design a focused motor finance compensation programme that is fair for both lenders and customers, warning that an overly broad redress scheme risks future investment in UK lending markets.
Speaking at a Parliament reception this week, FLA chair John Phillipou said it was critical that the final redress scheme is “more targeted and proportionate than the initial design” and welcomed discussions between the trade body and the Financial Conduct Authority (FCA) on the shape of the proposed programme – which will likely be launched next month.
The scheme would cover regulated motor finance agreements taken out between April 2007 and November 2024 where commission was paid by the lender to a broker.
The FCA estimates around 85% of 14m eligible consumers will take part in the scheme, which would mean compensation payouts of £8.2bn. At that level of take-up, the estimated costs to firms of implementing the scheme would be £2.8bn, taking the total cost to £11bn.
Phillipou who is managing director of SME lending at Paragon Bank framed the issue as one that extends beyond the motor finance sector, linking confidence in the UK’s regulatory system to jobs, growth and international capital flows.
Citing industry figures, Phillipou said the UK automotive sector supports nearly 800,000 jobs, with more than 183,000 roles in manufacturing, arguing that finance providers are a key part of enabling sales and wider economic activity.
Phillipou pointed to a shifting investor mood around UK motor finance, saying that current investors are already considering their position because of the potential scale of redress payments.
He referenced Chancellor Rachel Reeves’s recent pitch to investors in Davos, arguing that the message of the UK as an attractive destination for capital is being undermined by what he described as an increasingly unpredictable litigation landscape.
“At the heart of it is the role of the Financial Ombudsman Service,” he said, describing it as able to act as “judge and jury” because of its duty to decide cases on what is “fair and reasonable”.
“The upshot of the FOS’ approach is uncertainty, which is the enemy of investment and growth,” he added.
The Government has already consulted on reforms that would adapt how the Ombudsman applies the fair and reasonable test, including proposals to align it more closely with relevant FCA rules and guidance in regulated areas. Phillipou said the FLA hopes this will be enshrined in law soon.
Phillipou also criticised incentives in the current system that, he argued, have fuelled speculative complaints. He noted that claims management companies (CMC) and other professional representatives only began paying to refer cases to the Ombudsman recently, while firms faced significant case fees even where complaints were not upheld.
The Ombudsman introduced charges for professional representatives in April 2025, with respondent firms’ fees now reduced in certain circumstances when a complaint is not upheld or is withdrawn.
Phillipou said such dynamics have contributed to a more litigation-heavy environment, claiming the UK is top of the European league table for class action activity.
The FLA chair argued the motor finance controversy reflects deeper structural issues in the UK’s consumer credit framework, highlighting what he described as a layered regime combining the prescriptive Consumer Credit Act (CCA) with principles-based FCA rules and the Consumer Duty.
He pointed to FLA-commissioned research carried out with Eversheds Sutherland comparing UK consumer credit regulation and dispute resolution with other jurisdictions, concluding the UK is an outlier in both the complexity of its consumer credit rules and the operation of its ombudsman model.
“Taken together, this is why the UK needs CCA and FOS reform to unlock innovation and growth,” Phillipou said.
He closed by signalling the industry’s willingness to engage on a workable settlement, saying the FLA looked forward to working closely with the FCA to deliver a scheme that works for lenders and their customers, while reiterating the sector’s view that certainty and proportionality are essential to restoring investor confidence.
Speaking to AM at the February 2 event, Simon Kington, chief executive of Stellantis Financial Services, said he expected “common sense would prevail”.
“Once the scheme is operational we have to be ready to go from day one,” he explained, adding that, “It is taking all our focus and the big challenge has been the amount of work and focus involved. It has certainly diverted resource that could have been spent developing our operations.”
“I have no issue at all where the consumer has suffered harm and it is the consumer that should benefit from the scheme,” he added, “but I do have an issue where CMCs take a cut of any compensation payment. We also anticipate issues with more than one CMC handling the same complaint but it is not our job to sort out that.”
“Another issue is that documentation associated with early claims has likely to have been destroyed under GDPR rules and businesses would need to buy that back from businesses such as Experian and Equifax. Even so, that would not offer details such as commission arrangements and dealerships themselves will likely have destroyed it too in the move towards more digital operations.”
The FCA and Solicitors Regulation Authority (SRA) have now issued a joint warning to CMCs and law firms involved in motor finance commission claims to make sure consumers do not have multiple representatives for the same claim and are not charged excessive termination fees.
It will also be launching an advertising campaign on 5 February to warn consumers about scammers pretending to be car finance lenders and falsely claiming that people are owed compensation, despite there being no motor finance compensation scheme in place yet.
The FCA said it has increased monitoring of financial promotions which has led to the removal or amendment of more than 800 misleading adverts by FCA regulated CMCs since January 2024. The FCA recently opened an investigation into a CMC following concerns about its advertising and sales tactics in relation to potential motor finance commission claims.