FCA says car finance compensation will begin this year with average payouts of £829
Compensation scheme launched
Millions of people affected by the UK car finance mis-selling scandal are expected to receive compensation this year after the Financial Conduct Authority confirmed an industry-wide redress scheme.
The regulator said it had revised its earlier proposals after feedback from consumer groups, lenders, brokers and car manufacturers. It also tightened the eligibility rules so that, in its words, only those treated unfairly would be compensated.
The FCA said the scheme would put £7.5bn back into consumers’ pockets, with a likely total cost to lenders of £9.1bn. It expects millions of claims to be paid later this year and the vast majority to be settled by the end of 2027.
Who is covered
The scandal centred on commission payments from lenders to car dealers, which meant many buyers paid more for finance than they should have done without realising it.
The scheme covers motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was paid by the lender to the seller of the loan, usually the dealer. It also includes vans, camper vans and motorbikes.
The FCA had previously estimated that 14.2 million loan agreements would be considered unfair, but has now reduced that figure to 12.1 million. That does not necessarily mean 12.1 million individuals will receive payouts, as some motorists may have had more than one eligible agreement.
The scheme will mainly focus on deals involving discretionary commission arrangements, which were banned in 2021. Under those arrangements, dealers could set the interest rate and earn more commission by charging customers more.
Other cases may also qualify, including where a lender had an exclusivity or first-refusal arrangement with a dealer that was not properly disclosed, or where commission was unfairly high and not properly disclosed. The FCA said some agreements would still be judged fair, including where a consumer did not suffer a loss because no better deal was available.
How much could be paid
The FCA now expects eligible consumers to receive an average of £829 per agreement, up from an earlier estimate of £695.
For most people, compensation will consist of two parts:
- the commission paid
- an estimated loss based on a discount to the interest they paid: 17% for cases from April 2014, and 21% for earlier agreements
In about one in three cases, compensation will be capped because the FCA says consumers should not be put in a better position than they would have been if they had been treated fairly.
Interest will also be added, based on the annual average Bank of England base rate plus 1%, with a minimum of 3% in any year.
When payments could arrive
The FCA has urged consumers to complain now if they want to be compensated sooner. The scheme will be free to use.
It will be introduced in two parts. Scheme 1 covers agreements taken out between 6 April 2007 and 31 March 2014. Scheme 2 covers those taken out between 1 April 2014 and 1 November 2024.
There will first be a short implementation period for firms to prepare. For loans taken out after 1 April 2014, that period runs until 30 June this year. For older agreements, it runs until 31 August this year.
Lenders then have three months from the end of the relevant period to tell consumers whether they are owed compensation and how much. For a post-April 2014 agreement, for example, a lender must confirm any payout by 30 September this year. The consumer then has until 31 October to accept or challenge the offer, and payment must be made within a month, by November. The FCA said those are maximum deadlines and many payments may be made sooner.
Lenders will contact people who have not complained only if they appear likely to be owed money, and they have six months from the end of the relevant period to do so. Anyone not contacted has until 31 August 2027 to make a claim.
Claims firms warning
The FCA said there is no need to use a claims management company or law firm, warning that consumers could lose a significant share of any compensation if they do. It said some firms could charge up to 36% in fees including VAT.
Consumers can complain for free using a template letter on the FCA website. Those who have already signed up with a claims company can opt out, although they may have to pay an exit fee reflecting work already done.
The regulator also said consumers can take their complaint to court, but warned that the outcome is uncertain and that legal fees could leave many people with less money overall.