The UK’s FCA has warned banks they should prepare for possible customer redress in relation to motor finance arrangements that took place before 2021.

The watchdog has said in a statement it is looking into past cases of whether motor finance firms misguided customers over discretionary commission arrangements (DCAs), and whether customers lost out financially as a result.

In 2021, the UK regulator banned discretionary commission arrangements (DCAs), stopping brokers from receiving a commission fee from the lender or the bank when arranging a motor finance loan for customers.

The Supreme Court is expected to give a key ruling on the issue next week, and the decision could potentially lead to firms having to pay compensation for DCA arrangements before 2021.

The FCA said it wants to “make sure consumers are appropriately compensated in an orderly, consistent and efficient way” in case the Supreme Court decides that relevant rules were breached.

“We are confirming that if, taking into account the Supreme Court’s decision, we conclude motor finance customers have lost out from widespread failings by firms, then it’s likely we will consult on an industry-wide redress scheme,” the regulator said.

Redress scheme

The FCA will confirm within six weeks of the Supreme Court’s decision whether it is proposing a redress scheme, and will take it forward if so.

The rules around redress will be set by the FCA. But it will be left to firms themselves to determine whether customers have lost out because of the firms’ failings in the past. And if it is determined that they have, firms will then be expected to provide reasonable compensation to customers. The FCA has said it will put checks in place to ensure this.

“A redress scheme would be simpler for consumers than bringing a complaint. We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive,” the statement reads.

The regulator has said it wants to make sure that affected consumers receive a compensation, but that the motor finance industry also continues to work well for those who need it.

And with that balance in mind, the watchdog said: “Depending on the Supreme Court’s decision, we may also consult separately on changes to our rules.”