Compensation Scheme for Mis-Sold Car Finance to Be Detailed
Millions of drivers are set to learn how they can claim compensation for mis-sold car finance as the Financial Conduct Authority (FCA) prepares to publish its final rules on the scheme. The FCA will release its final decision late this afternoon, outlining the payout programme covering 14 million motor finance agreements.
This long-standing multi-billion-pound issue, which has involved a ruling by the UK's Supreme Court, is expected to result in average compensation payments of approximately £700 for a range of deals made between April 2007 and November 2024.
However, the regulator's scheme may still face legal challenges from lenders and claims management companies, potentially prolonging the wait for affected drivers.
Background of the Compensation Claims
The compensation relates to commission arrangements between lenders and dealers, unfair contract terms, and inaccurate information provided to car buyers. The FCA has been developing a centralised scheme designed to avoid the need for mis-sold agreements to be taken to court, although some drivers may opt to pursue legal claims independently in hopes of receiving larger payouts.
The FCA previously estimated that 44% of all motor finance agreements made from 2007 to late 2024 would qualify for payouts, amounting to more than £8 billion. Additionally, lenders are expected to incur around £3 billion in administrative costs.
A Supreme Court ruling in August narrowed the scope of these cases, preventing the potential compensation from escalating into tens of billions of pounds.
The majority of new vehicles, as well as many used cars, are purchased through finance agreements.
Discretionary Commission Arrangements and FCA Actions
In 2021, the FCA banned discretionary commission arrangements (DCAs), which involved car dealers receiving commission from lenders based on the interest rate charged to customers. These arrangements were often undisclosed.
The FCA stated that such commissions incentivised dealers to charge buyers higher interest rates than necessary, resulting in customers paying excessive amounts.
Using court judgements as a basis, the FCA also identified other sales practices as unfair, including:
- Commission arrangements that incentivised dealers to increase interest rates
- Unfair contract terms
- Provision of inaccurate or misleading information to consumers
The lenders' trade body, the Finance and Leasing Association (FLA), has argued that the FCA's conclusions were overly broad and that compensation might be too generous.
"That would result in redress being paid to millions of customers who experienced no unfair relationship, or no loss, diverting resources away from those for whom redress is genuinely due," the Finance and Leasing Association (FLA) has said.
Major lenders, including Lloyds Banking Group—the UK's largest banking group—have already set aside billions of pounds to cover compensation costs. Close Brothers has announced hundreds of job cuts due to its exposure to the compensation scheme.
Extended Wait for Drivers
Many drivers have waited years for compensation since DCAs were banned in 2021, with some finance agreements dating back nearly two decades.
Thousands of consumers have lodged complaints or initiated court claims, only to have their cases paused pending the FCA's finalisation of the scheme.
The regulator initially aimed to have the compensation scheme operational by early 2026, but delays and extended consultations, influenced by pressure from lenders, have pushed back the timeline.
A further concession allows for an implementation period of three to five months before lenders must contact customers who may be eligible for compensation.
Under current proposals, lenders will generally reach out to drivers to invite them to submit claims. Those who have already filed claims should receive offers and payouts sooner.
However, these timelines could be further delayed if lenders or claims management companies legally challenge the FCA's final decision.
They have 28 days to file a legal challenge to a tribunal, which could escalate to a higher court before any payouts are made.
