Growing Firestorm Over the FCA’s Redress Scheme
The Financial Conduct Authority’s proposed motor finance compensation plan is under intense scrutiny from all sides. A new report by the All-Party Parliamentary Group on Fair Banking (APPG) has slammed the FCA for a “£4.4 billion gap” in expected compensation payouts. According to the APPG, the regulator appears “influenced by the profit margins of the lenders,” leaving many customers under-compensated for past mis-selling of car finance deals. As criticism mounts, political pressure and industry backlash threaten to delay or reshape the scheme before it goes live in early 2026.
Stakeholder Outrage: Too Lenient vs. Too Harsh?
The motor finance redress proposals have drawn fire from two opposing camps. Consumer advocates and the APPG complain the scheme lets lenders off the hook by capping interest compensation at a low rate, while major banks argue it goes too far and will cripple profitability. In essence, the FCA finds itself squeezed between calls for tougher accountability and warnings of excessive costs.
John Cronin, banking analyst at Seapoint Insights, told City AM he expects the consultation to be extended past the current November 18 deadline, resulting in a “softening in some of the proposed parameters.” Meanwhile, lending giants such as Santander, Lloyds and Barclays have publicly questioned the fairness and affordability of the scheme.
Cost Projections and Timeline
The FCA initially estimated the total cost of the scheme at around £11 billion—substantially below earlier forecasts that warned of a bill as high as £18 billion. However, with both consumer groups and banks lining up to challenge its mechanics, the regulatory body may face tough negotiations over final payouts. The formal consultation window closes on November 18, and the FCA has indicated it will publish the full scheme outline in early 2026. Any delays or significant amendments could push implementation even further into next year.
Controversy Over Interest Rate
At the heart of the APPG’s critique is the FCA’s proposed compensatory interest rate of 2.09 percent. Consumer advisers argue that this figure substantially benefits the industry, rather than the customers who were overcharged. By contrast, the Supreme Court’s ruling in the landmark Johnson case awarded a claimant nearly seven percent interest on his mis-sold loan compensation, suggesting a far more generous approach is possible under existing law.
The FCA counters that its rate represents a balance between timely redress and systemic cost control. Yet campaigners insist the low rate fails to dissuade future mis-selling and deprives affected customers of full restitution.
Impact on Lenders and Market Reactions
Major banks are already provisioning tens of millions in anticipation of the final redress costs. Lloyds Banking Group has increased its provisions to £2 billion, while Barclays has set aside £325 million—nearly four times its previous estimate. Santander UK famously scrapped its third-quarter results release after CEO Mike Regnier warned that continued uncertainty over motor finance could “significantly impact jobs, growth and the broader UK economy.”
RBC analyst Benjamin Toms cautioned that the final scheme—and the FCA’s definition of “unfair” lending—could face legal challenges in the Administrative Courts, prolonging uncertainty for both customers and lenders.
Political and Budgetary Implications
With the Autumn Budget scheduled for November 26, the unresolved motor finance row has caught the Chancellor’s attention. John Cronin suggests that, without clarity by then, the government may feel compelled to adjust fiscal plans or even postpone certain tax measures. The spectre of a pre-Budget protest by banks and consumer groups could influence decisions on public spending and financial regulation.
Regulator under Fire for Overreach
Adding fuel to the fire, City AM reported that the FCA issued formal letters to claims management companies and law firms handling motor finance redress, demanding extensive data on their operations. Critics have labelled this move a “massive overreach,” arguing it shifts the regulator’s role from independent arbiter to inquisitorial watchdog. The FCA defends its stance as necessary for accurate scheme design and cost projection.
FCA’s Position and Next Steps
A spokesperson for the FCA emphasised the regulator’s aim “to deliver fair compensation to motor finance customers in a timely and efficient way.” While acknowledging diverse opinions, they insisted on working “together on the best possible scheme and drawing a line under this issue quickly.” The spokesperson warned that prolonged uncertainty would harm consumer trust and stall a market that serves millions of families annually.
As consultations continue, the FCA will need to balance competing demands—robust consumer protection, fair lender treatment, legal robustness, and economic stability. The final scheme’s design will determine whether the motor finance market can emerge stronger and more transparent, or whether another siege of litigation and political bickering lies ahead.