The UK’s financial regulator has called for a potential redress scheme that is fair to both the affected consumers as well as lenders in the now infamous car finance scheme.

The FCA’s statement comes as the Supreme Court prepares to give what is expected to be a landmark ruling in a case that has rocked the country’s car finance market.

While confirming that it supports compensation for affected customers, the regulator has insisted that any redress scheme should be measured and should not put motor finance companies out of business.

“If many firms were to go out of business or withdraw from the market, this could reduce competition and could make it more expensive for consumers to borrow money to buy a car in the future,” the statement adds.

The regulator has also warned that, in the event of motor finance companies going bankrupt and leaving the market, customers won’t receive any redress anyway “as motor finance isn’t covered by the Financial Services Compensation Scheme.”

In March this year, the FCA warned banks they should prepare for possible customer redress in relation to motor finance arrangements that took place before 2021.

In a statement at the time, the regulator said it was 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.

“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 statement in March said.

Difficult position

The FCA is in a difficult position, and a Supreme Court decision in favour of consumers could make things a lot more difficult. In 2021, the 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.

Since the commission was based on the interest rate, customers took the matter to court and accused brokers of giving them higher interest rates in order to receive a bigger commission from the lending bank.

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

The FCA itself has not yet made a final decision on what the redress scheme will look like, and is consulting different stakeholders in anticipation of the Supreme Court ruling. But it has previously said it will complete a faster-than-normal consultation process, possibly within six weeks, once the final ruling has been announced.

In its latest statement last week, the regulator said any potential redress scheme will be based on the principles of (1) comprehensiveness, (2) fairness, (3) certainty, (4) simplicity and cost effectiveness, (5) timeliness, (6) transparency and (7) market integrity.

In February this year, the Supreme Court blocked an attempt by the government to protect the motor finance industry from potentially paying billions in compensation to customers.