The UK's long-running motor finance scandal is set to spill into 2026, as a proposed multi-billion pound compensation scheme faces fierce opposition from both the banking industry and consumer advocates. The Financial Conduct Authority (FCA) finds itself in a precarious position, struggling to find a middle ground that satisfies neither side.
The FCA's Uphill Battle for a Solution
In December 2025, the City watchdog concluded its consultation on a redress scheme for the mis-selling of car finance loans linked to discretionary commission arrangements (DCAs). These were secret deals between car dealers and lenders that incentivised brokers to charge customers higher interest rates. The FCA's chief executive, Nikhil Rathi, made a public plea for cooperation during a Treasury Select Committee session, stating, "One way or another, we have to figure this out."
The regulator's initial plan, unveiled on 7 October 2025, estimated lenders would need to pay around £11bn in compensation. This figure, while substantial, was far lower than some City analysts' fears of a £40bn hit prior to a crucial Supreme Court ruling in August. The court's decision was mixed, upholding two out of three appeals from lenders but allowing the FCA to pursue redress on grounds of "unfairness." The FCA estimates the average payout for affected consumers would be £700 per agreement, with an estimated 14.2 million agreements eligible.
Banks Ramp Up Provisions and Criticise the Scheme
Major UK lenders have reacted strongly to the FCA's proposals, labelling the redress scheme as "disproportionate" and not reflective of the legal clarity provided by the courts. In response, they have significantly increased their financial provisions to cover the expected costs.
- Lloyds Banking Group, owner of Black Horse, raised its provision from £1.2bn to £2bn.
- Close Brothers nearly doubled its set-aside funds to £300m.
- Barclays almost quadrupled its provisions to £325m.
- BMW's UK arm set aside £200m.
Santander UK took the extraordinary step of scrapping its third-quarter results due to the uncertainty. The banks argue the FCA's proposed compensation threshold—where commissions over 35% are deemed unfair—is too low, especially after the Supreme Court only ruled in favour of a claimant who had a 55% commission rate.
Consumer Groups Warn of Legal Battles Over "Inadequate" Payouts
On the other side of the debate, consumer advocates are equally furious. The All-Party Parliamentary Group (APPG) on Fair Banking accused the FCA of creating a "£4.4bn gap" in the scheme and being unduly influenced by lender profits. A key point of contention is the compensatory interest rate. While analysts believe the successful Supreme Court claimant received nearly 7% interest, the FCA has proposed a rate of just 2.09% for its scheme.
Fresh data from Consumer Voice in December 2025 indicates a potential wave of legal action if consumers are not "genuinely compensated." Nearly half of those surveyed stated they would require at least £2,000 more than the FCA's proposed £700 average, suggesting the regulator's plan may fail to quell the dispute.
Government Pressure and Economic Warnings
The political dimension adds further complexity. Prior to the Supreme Court ruling, Chancellor Rachel Reeves was reportedly prepared to intervene over fears that a massive hit to banks would dampen UK investment. Industry leaders have since warned the government of severe consequences. Santander UK's boss cautioned that without intervention, the scheme could negatively impact the car finance market, credit supply, jobs, and growth across the automotive supply chain. BMW also sought a meeting with the Chancellor, expressing concerns about potential cuts to its luxury car provision in the Motability scheme and wider impacts under the Labour government.
With the full outline of the redress scheme expected in early 2026, the FCA's attempt to draw a line under this two-year saga is far from guaranteed. The stage is set for a protracted showdown involving regulators, powerful banks, determined consumer groups, and a government wary of economic fallout.
