Britain's financial watchdog has outlined key principles for a potential motor finance compensation scheme, emphasising it wants to make any redress process accessible to consumers without requiring expensive claims management companies.

The Financial Conduct Authority said it aims to create a scheme that would be "easy for consumers to understand and participate in, without needing to use a claims management company or law firm" if it decides to proceed following an expected Supreme Court ruling in July.

The regulator warned consumers against signing up with claims management companies now, noting they "may end up paying for a service they do not need and having to pay up to 30 per cent in fees out of any award they may receive."

The FCA is awaiting the Supreme Court's verdict on whether car dealers unlawfully received commission from lenders without providing customers sufficient information about these arrangements and obtaining their informed consent. The case follows a Court of Appeal decision that found such practices unlawful in three specific cases.

If the Supreme Court upholds the lower court's ruling, it could trigger what analysts predict may become a multi-billion pound compensation scheme affecting millions of motor finance customers. Some estimates suggest total provisions could exceed £30 billion.

Major lenders have already begun setting aside substantial reserves. Lloyds Banking Group has allocated £1.2 billion, Santander £295 million, and Close Brothers £165 million to cover potential claims.

The FCA emphasised that any redress scheme must balance consumer protection with market stability. "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 regulator stated.

The watchdog criticised "highly speculative figures" suggested by some claims management companies and law firms, indicating it may take a different approach to calculating compensation than methods based on Financial Ombudsman decisions.

Key decisions still to be made include whether the scheme would operate on an opt-in basis, requiring customers to confirm participation, or an opt-out system where consumers are automatically included unless they actively withdraw.

The FCA said it has been consulting with consumer groups, firms and trade bodies to gather views on the scheme's design. It committed to confirming within six weeks of the Supreme Court judgment whether it will proceed with a redress scheme and would then issue a consultation on detailed proposals.

The regulator expects any final scheme to be implemented in 2026, subject to consultation outcomes.

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