By Legal Futures Associate Recovery First
The Financial Conduct Authority (FCA) recently announced a lawyer-less compensation scheme for motor finance consumers, estimating that millions of car owners could receive an average payout of £700, with lenders paying out a total of £8.2 billion. The scheme is designed to provide a simple, free-to-use process, allowing consumers to claim without engaging a law firm or incurring legal fees.
While the FCA has emphasised the importance of market integrity and swift resolution, many legal professionals have expressed concern over the reduced compensation figures and the exclusion of lawyers from the process.
Regulatory scrutiny adds pressure on law firms
In addition to the challenges posed by the FCA’S lawyer-less motor finance compensation scheme, law firms are now under increased scrutiny regarding how they market motor finance claims. The SRA and the FCA have jointly acted to root out misleading literature on firms’ websites, ensuring consumers are fully informed about the real costs of engaging legal services.
Nine firms have been specifically instructed to disclose fees associated with walking away from a claim, while two claims management companies have had to amend exit fee policies. Some firms have been temporarily barred from taking on clients or advertising until they can demonstrate compliance with the new rules.
Paul Philip, SRA chief executive, emphasised:
“The risks and issues facing consumers in this area of the market are unprecedented, and we are using all the levers at our disposal to protect consumers, identify poor practices and hold law firms to account.”
Regulators are particularly concerned about unrealistic claims regarding success rates or compensation values, and the FCA is actively running a £1 million advertising campaign to educate consumers that they do not need to use a lawyer or claims management company to secure compensation.
Challenges for law firms
The FCA’s motor finance compensation scheme represents a significant shift in the legal claims landscape, creating new challenges for law firms that previously relied on these types of consumer claims. Historically, firms handling these types of claims could rely on a steady stream of work and associated revenue from consumers seeking redress for unfair practices. Now, with the regulator offering a lawyer-free compensation route, firms are confronted with a new reality.
Potential challenges for law firms include:
Market disruption and uncertainty – The FCA scheme illustrates how regulatory changes can disrupt traditional legal markets. Firms may need to reassess which services remain profitable and identify areas where clients still require legal expertise.
Loss of potential revenue – Law firms that specialised in motor finance claims could face a significant drop in revenue. With the FCA scheme allowing consumers to bypass legal representation, firms risk losing a substantial source of income.
Stranded Work-in-Progress (WIP) – Firms with ongoing claims may encounter stranded WIP – work that has been completed but cannot be billed due to the regulator-led process. This can impact cashflow, particularly for smaller firms or those heavily reliant on claims-related revenue.
Navigating the path forward
Given the regulatory changes and increased scrutiny, many firms are considering how best to manage existing WIP, reassess their operational structure, or exit certain areas of work in a compliant and financially responsible way.
Options available to firms include:
- Developing structured WIP management plans to minimise financial loss from abruptly halted or unbillable work.
- Re-evaluating practice areas to identify where sustainable demand remains.
- Implementing controlled exits from unprofitable or high-risk areas while safeguarding client interests and maintaining regulatory compliance.
- Exploring restructuring strategies where necessary to support long-term financial health.
To address these challenges, collaboration with niche service providers, such as Recovery First, can be key. As partners, we support law firms facing organisational challenges or financial difficulties by providing structured assistance in planning an orderly closure or the process of restructuring.
By implementing structured WIP management solutions, firms can maximise potential income while maintaining full regulatory compliance. With Recovery First’s expertise, months or even years of work are not lost due to sudden regulatory changes.
