The Finance & Leasing Association (FLA) has responded to the UK Financial Conduct Authority's (FCA) consultation on the Section 404 motor finance redress scheme, urging adjustments to ensure fairness for both borrowers and lenders.
Announced in October, the FCA’s proposal would allow for compensation payments related to an estimated 14 million motor finance agreements identified as potentially unfair, with payouts potentially starting as soon as next year.
While FLA-affiliated lenders support a credible redress process for affected customers, concerns remain that the current proposal does not meet the FCA’s own standards. The association is calling for the scheme to compensate only consumers “who have actually suffered loss,” help protect long-term access to credit, avoid paying compensation when no unfair relationship occurred, and be delivered within a practical timeframe.
The FLA emphasised that a credible Section 404 FSMA redress programme should uphold fairness for all parties. It warned that the FCA’s current approach could result in compensation being granted to many who did not experience harm, potentially diverting resources from those genuinely entitled to redress.
FLA CEO Shanika Amarasekara (pictured above) said the submission reflects extensive analysis by industry practitioners, economists, and leading motor finance experts. She noted that “the most important point is simple: a redress scheme must provide redress to those who have suffered loss as a result of an unfair credit relationship. Where we differ from the FCA’s proposals, it is because evidence shows there are fairer, more targeted, and more efficient ways to achieve that outcome.”
The FLA has proposed alternative methods for assessing liability and consumer loss, along with suggestions to make implementation manageable. Earlier FLA data indicated a 3% increase in new consumer car finance business in October 2025 compared to the same month in 2024.
The FCA’s £11 billion redress scheme for mis-sold motor finance has left banks bracing for significant payouts and raised questions over consumer trust in financial services. Lloyds Banking Group, the UK’s largest car finance lender, warned it would need to increase its £1.15 billion compensation provision after reviewing the FCA’s proposed scheme, prompting a more than 3% drop in its share price.
The FCA estimated that 14.2 million motor finance agreements made between 2007 and 2024 could be eligible for compensation, with an average payout of £700 per case. Most affected consumers are expected to seek redress, potentially pushing total industry costs beyond current provisions at banks including Barclays, Santander UK, and Close Brothers.
To manage the anticipated volume of complaints, the FCA will lift the pause on handling most motor finance complaints on May 31, 2026. The pause, introduced in January 2024 for complaints linked to commission arrangements between motor finance lenders and brokers, was intended to prevent disorderly, inconsistent, and inefficient outcomes for consumers and firms while the regulator assessed whether commission disclosure had been adequate.
