The City’s financial watchdog has been accused of “nakedly taking the side of lenders” in its proposed compensation scheme for motorists who were overcharged through car-finance deals. MPs have warned that the Financial Conduct Authority (FCA) appears more concerned about lender profits than fairness for consumers.
A cross-party group of parliamentarians has sharply criticised the FCA’s planned redress scheme, intended to compensate millions of drivers who unknowingly paid inflated interest rates due to commission-driven lending practices between banks and car dealerships. The All-Party Parliamentary Group (APPG) on Fair Banking stated that the regulator’s approach has been ‘patently influenced’ by profit, concerns expressed by lenders and industry lobbyists, accusing it of echoing their ‘doom-mongering’ regarding the alleged economic risks of providing full compensation.
Its new report argues that the FCA’s proposed framework is ‘not fit for purpose’ and represents a retreat from the principle of consumer protection that underpins the regulator’s authority. Sources (1,2,8)
Regulator accused of shielding lenders from full accountability
The MPs’ statement is the latest in a series of increasing challenges to the regulator’s plan. The APPG claims that by capping likely redress at between £8.2 billion and £9.7 billion, the FCA is effectively reducing compensation by nearly half of what victims may actually be owed. According to the group’s analysis, the total overcharging linked to discretionary commission arrangements could reach as high as £15.6 billion, based on more current data rather than the FCA’s older 2019 estimates.
Under the regulator’s proposed scheme, average payments would be approximately £700 per claim, which is less than half the £1,500 some consumers have recovered through court cases. MPs argue that this imbalance indicates a regulator too willing to minimise the financial burden on lenders rather than restore justice to those affected.
“The FCA has been far too sympathetic to lender concerns,” the report states, “allowing industry fears about profitability and market disruption to dictate policy. Rather than defending consumers, it has chosen to defend margins.”
The APPG also highlights the regulator’s repeated warnings in its consultation documents that higher compensation costs could “dent lender profit margins” or “impact consumer choice” if some firms withdrew from the market. Those warnings, it states, follow a consistent pattern, describing them as “a clear attempt to shield lenders from accountability under the guise of market stability.”
Siobhain McDonagh, Labour MP and APPG member, stated the watchdog’s current proposals “read more like a lender’s submission than a regulator’s plan”. “Our core finding is that the FCA has patently been influenced by the profit margins of the lenders when deciding upon levels of redress,” she stated. “From proposing that lenders act as judge and jury on their own cases, to the extraordinarily low compensatory interest rate on offer, the scheme acts against the interests of consumers and markedly favours the sector.”
The MPs are particularly concerned that lenders would be able to assess claims made by their own former customers, an arrangement that poses clear conflicts of interest. The report concludes that “allowing firms to effectively mark their own homework is not independent oversight, it is regulatory capture.”
The group further criticises the complexity of the compensation model, warning that it is so technical and opaque that consumers could struggle to understand or challenge the calculations. Lawyers have already cautioned that the process could lead to inconsistent outcomes, where similar cases yield different redress amounts depending on how lenders interpret the guidance.
Meanwhile, banks and the FCA have argued that borrowers who take their cases to court may lose up to 30% of their compensation in legal fees if they use claims management firms. However, consumer advocates highlight that this is a misleading comparison, as many solicitors handling car-finance cases work on capped or conditional-fee terms and are already recovering significantly higher net awards for their clients than the FCA’s proposed payouts. Sources (1,2,4)
Industry pressure and political influence
Behind the scenes, pressure from lenders and their lobby groups has been intense. For months, major financial institutions and motor finance companies have warned that a substantial compensation bill could ‘destabilise’ the market, increase borrowing costs, and potentially push some smaller lenders to the brink.
In January, the then newly appointed chancellor, Rachel Reeves, took the unusual step of intervening during a landmark Supreme Court case on the issue, cautioning judges against awarding what she described as “windfall” payouts to borrowers. That case, which involved several of the UK’s largest lenders, including Lloyds, Barclays, Close Brothers, and the finance arms of carmakers such as Ford, had initially left the industry anticipating potential liabilities as high as £44 billion. When the Supreme Court issued its decision in August, it provided clarity that significantly reduced those estimates. The FCA’s latest calculations now place the overall compensation bill, including administrative costs, closer to £11 billion.
Nevertheless, lenders have continued to lobby vigorously against the scheme, with industry leaders warning that it could still harm investment and jobs. Recently, Santander UK’s chief executive, Mike Regnier, called for further government intervention, asserting that the FCA’s current design could cause ‘significant harm’ to consumers and the wider economy.
Consumer rights advocates and Members of Parliament (MPs) argue that these warnings have been overstated and seem intended to pressure regulators and ministers into reducing consumer compensation. “This narrative of economic disaster has been carefully constructed,” one parliamentary source stated. “It follows the same pattern seen during the PPI scandal. When the figures are significant, lenders assert that compensating consumers would somehow jeopardise the market. It did not then, and it is unlikely to do so now.”
The Financial Conduct Authority (FCA) maintains that it is striving to balance fairness with stability. In a statement, the regulator noted: “We have proposed a scheme to compensate motor finance customers fairly, in a timely and efficient manner. We acknowledge that there will be diverse opinions on the scheme and that not all parties will receive everything they desire. However, we aim to collaborate on the most effective scheme and resolve this issue promptly.”
Critics contend that “certainty” for the industry should not be prioritised over justice for consumers. They observe that, in practice, it frequently requires significant external pressure from MPs, consumer rights lawyers, and the courts for regulators to adequately address widespread financial misconduct.
For many affected borrowers, this issue is deeply personal. Tens of thousands of drivers entered into car finance agreements without realising that lenders had covertly paid dealers hidden commissions that encouraged higher interest rates. Some families are now finding that they paid hundreds or even thousands of pounds more for their vehicles than necessary.
Consumer law firms have characterised the FCA’s current proposals as “deeply disappointing,” cautioning that they may obstruct a vital avenue for fair redress. “The regulator’s role should be to protect consumers, not to shield lenders from their own misconduct,” stated a solicitor specialising in financial mis-selling cases. “This scheme may risk achieving the opposite.”
The broader issue, according to MPs, concerns regulatory integrity. If the FCA, the authority responsible for upholding trust in financial markets, is perceived to yield to lobbying pressure, it risks eroding public confidence in the concept of independent regulation.
Currently, the consultation period is ongoing, with responses anticipated in the coming weeks. Consumer groups and legal representatives are urging the FCA to reassess the scale of payouts and to eliminate provisions that permit lenders to adjudicate their own cases. They argue that only a transparent, independently supervised process can restore public trust and provide justice to those who have been overcharged. As Siobhain McDonagh stated: “Ultimately, this report arrives at a clear and unequivocal conclusion: the proposed redress scheme is not fit for purpose.”
The Financing and Leasing Association was contacted for comment but had not responded by the time of publication. Sources (2,5,6,7)
References
- All-Party Parliamentary Group on Fair Banking (2025). Car Finance – Scandal Assessing Redress (Report, November 2025).
- Financial Conduct Authority (2025). Consultation Paper CP25/27: Motor Finance Consumer Redress Scheme. Consultation Paper CP25/27: Motor Finance Consumer Redress Scheme (7 October 2025)
- Financial Conduct Authority (2025). FCA to consult on a compensation scheme for motor finance customers (Statement, 3 August 2025; updated 4 August 2025).
- Financial Conduct Authority (2025). Key considerations for implementing a possible motor finance consumer redress scheme (Statement, October 2025).
- Supreme Court of the United Kingdom (2025). Wrench v FirstRand Bank Ltd; Hopcraft v Close Brothers Ltd; Johnson v FirstRand Bank Ltd (Judgments delivered 1 August 2025).
- The Guardian (2025). Chancellor’s attempt to intervene in car finance scandal branded ‘disgraceful’ (2 August 2025).
- The Guardian (2025). Car finance redress scheme shows City watchdog “nakedly siding with lenders”, MPs say (3 November 2025).
- City A.M. (2025). Motor finance backlash mounts with calls to pull £4bn from lenders. (3 November 2025)
