The redress scheme being prepared by the Financial Conduct Authority (FCA) in response to the UK car finance scandal is forcing manufacturers and lenders across the industry to take decisive action.
Several firms have already set aside substantial funds to cover potential compensation claims, and the latest development comes from BMW. The automotive giant has announced that it has allocated more than £200 million to address possible liabilities linked to historic motor finance agreements, a sharp increase in the provisions it reported previously.
It is a major escalation. Just a year earlier, the company’s UK finance arm had set aside around £70 million. The tripling of this figure reflects both the uncertainty surrounding the ultimate cost of claims and the likelihood that compensation payments will be substantial once the FCA’s redress scheme is finalised.
In its own statements, BMW has acknowledged that “considerable uncertainty” remains. The company has highlighted that small changes in assumptions—such as the rate at which claims succeed—may lead to significant swings in the final total. For example, an increase of just five percentage points in successful claims could cost the firm an additional £31 million.
Other finance providers are taking similar measures. Lloyds Banking Group, Close Brothers, and other lenders have already set aside large sums in anticipation of redress. Collectively, the industry is bracing for one of the most expensive compensation schemes since the Payment Protection Insurance (PPI) scandal.
What the Scandal Is About
Here are the key features of the scandal:
- Discretionary Commission Arrangements (DCAs): Under these arrangements, dealers and brokers who arranged finance for customers could vary their commission based on the interest rate they charged. In practice, this meant that a dealer might steer a customer towards a higher interest rate to secure a larger cut, even if the customer might have qualified for a lower rate.
- Disclosure and consumer awareness: Often, these commissions were not properly disclosed to consumers. That is, customers were not fully informed that their interest rate might be affected by how much remuneration the dealer stood to earn.
- Regulatory change: The FCA banned such discretionary commission arrangements in 2021. Since then, there’s been increasing scrutiny over past contracts, and many consumers have lodged complaints.
- Legal rulings: The courts have also been involved. A decision by the Court of Appeal earlier found certain undisclosed commissions to be unlawful in the absence of proper disclosure and customer consent. However, despite that, some rulings (including a recent Supreme Court decision) have eased certain obligations—but not removed all risks or the need for redress.
What the FCA Is Doing
The Financial Conduct Authority (FCA) has taken several steps to investigate, regulate, and remedy the situation:
- Review and investigation of past practices: The FCA has been undertaking work to examine historical motor finance remuneration arrangements, especially discretionary commissions, and how they were sold by brokers and dealers.
- Regulatory ban on DCAs (2021): As noted, discretionary commission arrangements that create conflicts of interest—because they incentivise higher interest rates for the lender or broker—have been banned.
- Consumer redress scheme: The FCA is proposing an industry-wide scheme to compensate customers who were misled or adversely affected by discretionary commission arrangements. The consultation on this plan is expected early in October 2025, and compensation payments are anticipated to begin in 2026.
- Estimating the cost: The regulator’s estimates suggest that the potential liability for the industry could be in the region of £9 billion to £18 billion, including administrative costs. These figures are indicative, and the final cost may be higher or lower.
- Ensuring fairness and stability: The FCA has emphasised that while consumers should receive redress where they have been wronged, compensation schemes should not push firms out of business or reduce competition in the market. This could lead to car finance becoming less accessible or more expensive in the future.
Implications and Next Steps
BMW’s decision demonstrates the seriousness of the UK motor finance scandal and the looming impact of the FCA’s forthcoming redress scheme. For consumers, the initiative offers hope of fair compensation for years of inflated borrowing costs. For firms, it serves as a stark reminder of the need for transparency and ethical conduct.
If you entered into a car finance agreement between 2007 and 2020, you may be eligible to claim compensation. You can verify your position by using our Eligibility Checker, a secure tool designed to provide clarity on whether you are likely to qualify under the forthcoming redress programme.
