FCA Issues Guidance on Motor Finance Settlements: Will Lenders Break Cover?

The Financial Conduct Authority has issued guidance for lenders wishing to make early settlement offers to motor finance customers while the official redress scheme remains partially suspended. This move allows firms to address complaints ahead of a wider 2027 resolution, provided they meet strict transparency requirements regarding the finality of these payments.

What was announced

The Financial Conduct Authority (FCA) has established a framework for lenders to resolve motor finance complaints before the conclusion of ongoing legal challenges, which are expected to delay the formal compensation scheme until at least 2027. The regulator’s research indicates a strong consumer appetite for early resolution, with 89% of affected car finance customers expressing a desire for the choice of an immediate offer rather than waiting for legal proceedings to conclude. Furthermore, 77% of respondents noted that receiving compensation sooner would make a substantial difference to their financial stability.

Under the new expectations, firms must ensure absolute clarity regarding the terms of a "full and final" settlement. Customers must be informed that by accepting an offer, they retain the funds regardless of whether future legal rulings suggest a lower redress amount. Conversely, they forfeit the right to claim additional compensation if a later ruling suggests they would have been entitled to more. Because customers retain the right to reject these early offers and leave their claim to be dealt with under the formal scheme, these specific settlement proposals cannot be referred to the Financial Ombudsman Service for review. Lenders are now tasked with implementing robust systems to identify eligible claimants and calculate accurate compensation figures that align with the regulator's standards, even as the final scope of the wider scheme remains uncertain.

"The FCA’s announcement provides welcome clarity for motor finance lenders but also underlines the significant operational and financial preparations required to deliver compensation to affected customers."

Harry Charalambous, Principal at leading banking and credit advisory consultancy Broadstone

The companies involved

Broadstone is a prominent consultancy firm specializing in banking and credit advisory services. The firm provides strategic guidance to financial institutions navigating complex regulatory environments, particularly within the United Kingdom's lending market. With a focus on operational efficiency and compliance, the company assists lenders in developing systems to manage large-scale redress programs and affordability assessments. Harry Charalambous serves as a Principal in the banking and credit advisory division at the firm.

Operating as an independent consultancy, Broadstone has established itself as a key commentator on the intersection of regulatory policy and financial services operations. The firm’s expertise spans across various facets of the credit lifecycle, from initial affordability checks to the management of legacy issues such as the current motor finance dispute. As an advisory body, it often acts as an intermediary between regulatory expectations and the practicalities of banking infrastructure, helping firms to provision for potential liabilities and update their internal processes to meet evolving standards set by the Financial Conduct Authority.

What FF News has reported before

FF News has previously covered Broadstone’s involvement in the lending sector, including the firm's efforts to help financial institutions benchmark their internal processes. In September 2024, the publication reported that Broadstone Launches Affordability Health Check to Enhance Lender Compliance, a tool designed to assist lenders in meeting regulatory standards. The publication has also tracked broader regulatory trends affecting the UK market, such as the FCA Analysis Reveals 1 in 7 English Mortgages at Risk from Flooding.

More recently, FF News highlighted the firm's perspective on macroeconomic shifts in UK Budget: How Potential Bank Tax Hikes and New Mortgage Rules Will Impact Lending, and its stance on technological infrastructure in Broadstone Urges Data Residency Focus for UK Chancellor’s New Sovereign AI Unit.

What this means

This guidance effectively breaks the stalemate that has characterized the motor finance sector since the redress scheme's suspension. By providing a "safe harbor" for early settlements, the FCA is shifting the burden of choice onto the consumer while placing immense operational pressure on lenders to get their calculations right the first time. The industry now faces a fragmented landscape where some firms may choose to settle early to clear their balance sheets of contingent liabilities, while others may wait for the 2027 legal conclusion. This creates a competitive tension in customer service; lenders who delay may face reputational risks if peers begin payouts immediately, yet those who move early risk overpaying if legal precedents eventually favor the industry.