The UK's financial watchdog has moved to protect drivers caught up in the motor finance mis-selling scandal, telling lenders that any early settlement offers must not shortchange customers while a wider compensation scheme remains on hold.
The Financial Conduct Authority (FCA) issued new guidance on Tuesday setting out its "minimum expectations" for lenders making voluntary payouts. Any offer made before the regulator's formal redress framework is fully up and running must be at least as generous as what a customer could have received under that scheme, which Reuters has estimated could total £9.1 billion in compensation.
The move effectively creates a floor for early settlements, preventing banks from using the pause in the official process to push through lowball offers that close complaints cheaply.
Why the scheme is paused
The FCA's redress scheme, which would handle complaints from consumers who were charged too much interest on car loans, is partly suspended while it faces legal challenges. The watchdog has been working on the framework since a landmark court ruling in 2024 that found lenders could be liable for commission arrangements that were not properly disclosed to borrowers.
That ruling opened the door to a wave of complaints and forced banks to set aside billions of pounds in provisions. But the process has been complicated by appeals and ongoing litigation, leaving both lenders and customers in limbo.
In the meantime, the FCA says firms can still make offers to customers who have complained, but they must be able to demonstrate that the calculation is "full and fair" — not a quick attempt to settle for less than the customer would be entitled to under the formal scheme.
Barclays first to sign up
Barclays, one of the UK's largest banks, was the first to confirm it will use the FCA's methodology when making early offers. The bank said some customers of its Barclays Partner Finance division who have complaints acknowledged on or before October 1st, 2026 will be contacted soon. They will receive an explanation of how any offer is calculated and what accepting it means.
For lenders, the practical impact is less about the headline £9.1 billion figure and more about reducing uncertainty. With a clearer benchmark in place, banks can better estimate their likely cash outflows and decide how much to set aside in provisions — the accounting reserves they hold against expected losses — even before the formal scheme restarts.
That is particularly relevant for the lenders Reuters has linked to the case, including Barclays, Lloyds, and Close Brothers. Lloyds' recent earnings showed how the issue can weigh on profits, even as the bank's overall performance improved.
What it means for investors
For investors, the FCA's move is a step toward making motor finance liabilities easier to price. The £9.1 billion benchmark narrows the range of "unknown unknowns" that have made it hard to value banks exposed to the scandal.
Instead of an open-ended legal overhang, the issue becomes a more quantifiable earnings hit. Analysts will now focus on how quickly banks take provisions and how large those provisions are, rather than guessing at worst-case scenarios.
That could be positive for bank shares, which have been under pressure since the motor finance ruling. But it also means the cost is now more certain — and for some lenders, that cost could be significant.
For everyday investors, the key takeaway is that the FCA is trying to ensure fairness for consumers while giving the market a clearer picture of what banks owe. If you have a car finance complaint, the guidance means any offer you receive should be based on the same calculation the regulator would use — and you should be told how it was worked out.
The FCA's stance also signals that the regulator is determined to see the redress scheme through, despite the legal challenges. That could mean more provisions for banks in the coming quarters, but it also removes some of the uncertainty that has hung over the sector.
As the situation develops, investors will be watching for updates on the court challenges and for any signs that lenders are moving to settle early. The FCA's guidance is a reminder that, in this case, the regulator is putting consumers first — and that banks will have to pay up, one way or another.
