Car Finance Compensation: What SME Fleet Buyers Must Know

What the compensation scheme covers

The roots of the current redress regime lie in the Supreme Court ruling of October 2024 in the joined cases of Close Brothers v Johnson and Hopcraft v FirstRand. The court found that lenders owed a fiduciary duty to borrowers and were liable where commission arrangements between lenders and car dealers had not been properly disclosed, as reported by the BBC.

The judgment went further than many in the industry expected. It did not limit liability to so-called discretionary commission arrangements (DCAs), the model the FCA had already banned in January 2021. Instead, the ruling cast the net wider, potentially capturing any finance agreement where a commission was paid to a dealer and the borrower was not adequately informed.

DCAs allowed dealers to set or adjust the interest rate on a customer's finance agreement, with the dealer earning a larger commission the higher the rate charged. These arrangements created an obvious conflict of interest. However, fixed-rate commission models, where the dealer received a flat fee or a set percentage, may also fall within scope if the existence or amount of the commission was not disclosed at the point of sale.

The FCA has been consulting on a structured redress scheme to handle the expected volume of claims. Industry-wide liability estimates vary considerably. Figures cited in financial press reports range from £16 billion to £44 billion, according to analysis published by the BBC and separate assessments by banking analysts. The wide range reflects uncertainty over how many agreements will qualify and what level of compensation the regulator will mandate.

How redress payments are expected to work

The FCA's proposed approach, still subject to consultation outcomes, would require lenders to review past finance agreements, identify those where commission was not disclosed, and calculate redress on a standardised basis.

Redress is expected to reflect the difference between what the borrower paid and what they would have paid had the commission arrangement been transparent or had the conflict of interest not existed. For DCA agreements, this typically means the difference between the interest rate the dealer set and the lower rate the lender would have offered directly.

For fixed commission agreements caught by the Supreme Court ruling, the calculation is less straightforward. The FCA is expected to set out a methodology, but the principle remains the same: borrowers should be returned to the position they would have been in absent the undisclosed commission.

The Financial Ombudsman Service (FOS) has been receiving car finance complaints at an elevated rate since the ruling. The FCA paused the FOS complaint-handling deadline to give itself time to design a scheme that avoids a disorderly flood of individual adjudications.

Timelines remain uncertain. The FCA has indicated that a final framework could be confirmed later in 2026, with payments potentially beginning in late 2026 or 2027, according to the BBC's reporting on the regulator's consultation process. Claimants who have already submitted complaints to the FOS or directly to lenders will not lose their place; the pause is administrative, not a bar on future claims.

Impact on major motor-finance lenders

Close Brothers (LSE: CBG) was a named defendant in the Supreme Court case and has seen its share price fall sharply since the ruling. The company has taken provisions against potential redress costs but has warned that the final liability remains difficult to quantify, according to its regulatory filings.

Lloyds Banking Group (LSE: LLOY), which operates the Black Horse motor finance division, is the largest player in the UK car finance market by volume. Lloyds had set aside £450 million in provisions by early 2025, according to its annual results, but analysts have suggested the final bill could be materially higher. The bank's share price has reflected that uncertainty.

Barclays Partner Finance, part of Barclays (LSE: BARC), and MotoNovo Finance, owned by South Africa's FirstRand, the other defendant in the Supreme Court case, also face significant exposure. FirstRand has disclosed provisions in its financial statements but, like its peers, has cautioned that estimates are preliminary.

Capital adequacy is a live concern. The Prudential Regulation Authority is monitoring whether lenders' buffers are sufficient to absorb redress costs without impairing their ability to lend. For the motor finance market as a whole, this creates a feedback loop: tighter lender balance sheets could mean tighter credit terms for future borrowers, including businesses.

Implications for SME fleet finance

Much of the public discussion has focused on individual consumers who took out personal contract purchase (PCP) or hire purchase (HP) agreements. But many SMEs financed company vehicles through identical dealer-lender commission structures.

A business that acquired a fleet of five, ten, or fifty vehicles on finance through a dealership may have been subject to the same undisclosed commissions. The aggregate overpayment across a fleet could be substantial.

However, there is an important distinction. The FCA's consumer protection remit and the FOS's jurisdiction apply primarily to regulated consumer credit agreements. Business-use finance agreements, particularly those above the £25,000 threshold or entered into by incorporated entities, may fall outside the FOS complaints process.

That does not mean businesses have no route to redress. The Supreme Court ruling established a common-law principle of fiduciary duty that is not limited to consumer credit regulation. SMEs may be able to pursue claims through the courts, though this is more costly and slower than the FOS route.

Finance directors should also consider the knock-on effects of the redress scheme on future borrowing. If major lenders tighten motor finance underwriting criteria or increase rates to rebuild margins, the cost of financing fleet vehicles will rise. Some lenders may withdraw from certain segments of the market altogether, reducing competition.

Regulated versus unregulated agreements

Whether a business finance agreement is regulated depends on several factors: the amount borrowed, the legal status of the borrower, and how the agreement was structured. Sole traders and small partnerships may find their agreements are treated as consumer credit and therefore fall within the FCA's redress scheme. Limited companies are more likely to fall outside it. The detail matters, and it varies case by case.

What operators should do now

SME finance directors and fleet managers should start by auditing existing and historical vehicle finance agreements. The key questions are: was a commission paid to the dealer, was it disclosed, and was the agreement regulated or unregulated?

For regulated agreements, submitting a complaint to the lender or the FOS preserves the right to redress under whatever scheme the FCA finalises. The current pause on FOS deadlines means there is no immediate urgency, but early registration avoids the risk of being caught by any future cut-off date.

For unregulated business agreements, legal advice is warranted. The Supreme Court ruling opens a potential route, but the cost-benefit calculation of litigation is different from a free FOS complaint.

Businesses should also review current fleet financing arrangements. The post-DCA market has already shifted towards fixed-commission models with greater transparency, but operators should confirm that any commission paid to a dealer is disclosed in writing.

Finally, cash-flow planning should account for the possibility that redress payments, if they materialise, may not arrive until late 2026 or 2027. They should not be factored into near-term budgets as receivables. Equally, businesses should model the scenario in which motor finance becomes more expensive or harder to obtain as lenders absorb the cost of the industry-wide scheme.