How car finance compensation payments are expected to work

Compensation plans

Millions of people who were mis-sold car finance could be entitled to compensation, although the Financial Conduct Authority now says payouts may be lower than previously suggested.

The regulator said compensation could relate to 14 million loans taken out between April 2007 and November 2024, about 44% of all such loans during that period. Its latest proposals suggest average payouts of about £700 per mis-sold agreement, down from an earlier estimate of less than £950. That would put the total cost of redress at around £8.2bn, at the bottom end of its estimate.

The exact amount any individual receives will depend on the degree of harm suffered. Complaints have already been made over four million finance agreements, and those customers do not need to do anything further.

Why the compensation is being considered

The vast majority of new cars, and many second-hand ones, are bought using finance agreements, typically involving a deposit followed by monthly payments with interest.

In 2021, the FCA banned discretionary commission arrangements, in which car dealers received commission from lenders based on the interest rate charged to customers. These arrangements were often not disclosed. The FCA said they created an incentive for dealers to charge higher-than-necessary interest rates, leaving buyers paying too much.

The regulator has also identified other potentially unfair contracts, including cases where commission paid to the dealer was especially high, accounting for at least 35% of the total cost of credit and 10% of the loan. Some customers were also not given accurate information about the best finance deal because of exclusive arrangements with certain lenders.

How claims will work

The FCA said anyone who has not yet complained should contact their car finance provider directly rather than using a third-party claims management company. It has also published guidance on how to complain.

The regulator had wanted the compensation scheme to be operating by early 2026, with quick payouts after that. But after pressure from lenders, it extended the consultation period and now expects final rules to be confirmed in February or March 2026.

For some customers, especially where contact details have changed, compensation could still take many months to arrive. Regulators have also warned claims management companies and law firms to ensure consumers do not end up with multiple representatives for the same claim or face excessive termination fees.

Who will pay

The industry is expected to meet the full cost of any compensation scheme, including administration. Lenders, including some of the UK's biggest banks and specialist motor finance firms, have already set aside more than £3bn for possible payouts.

Among the provisions disclosed, Lloyds Bank increased its allocation from £1.15bn to £1.95bn. Barclays raised its provision to £325m. Santander set aside £295m, later adding a further £183m. Bank of Ireland, the parent company of Northridge Finance, increased its provision from £143m to £350m. Other firms, including Close Brothers and MotoNovo through FirstRand, have also set aside substantial sums.

Some lenders have argued the costs could affect future lending, although the evidence for that is unclear. The Finance and Leasing Association said it believed the FCA was "overcompensating" and questioned the scale of the regulator's estimates. The FCA said its proposed scheme was the best outcome for both consumers and lenders and would help draw a line under the issue.

Supreme Court ruling

The scope of compensation was narrowed by a Supreme Court ruling in August 2025, which found in favour of finance companies in two of three key test cases.

The court considered whether undisclosed commission payments made by finance companies to dealers amounted to bribery, and whether dealers had a duty to act on behalf of customers rather than in their own interests.

The one test case that succeeded was brought by Marcus Johnson, who bought his first car, a Suzuki Swift, in 2017. He was not told the dealership was being paid 25% commission, which was added to the amount he had to repay. The Supreme Court found that the terms of his finance deal were unfair because of the size of the commission payment and because he appeared to have been misled about the relationship between the dealer and the finance firm.

Johnson said he was pleased for himself that his case had succeeded, but disappointed for the many others who would now miss out.