Who could receive car finance compensation?
Millions of drivers will learn on Monday how to claim compensation for mis-sold car finance agreements. The Financial Conduct Authority (FCA) is publishing rules that anticipate average payments of about £700.
The majority of new cars, and many used ones, are purchased through finance agreements where customers pay a deposit followed by monthly fees including interest. Compensation may be available to those who took out car loans between April 2007 and November 2024.
The FCA's decision affects approximately 14 million car loans, representing about 44% of all loans during this period.
In 2021, the FCA banned discretionary commission arrangements (DCAs), where car dealers received commissions from lenders based on the interest rate charged to customers. Often, customers were not informed about these commissions.
The FCA stated that such arrangements incentivized dealers to charge higher interest rates, causing customers to pay more than necessary.
Additionally, some contracts were deemed unfair because dealer commissions were excessively high—at least 35% of the total credit cost and 10% of the loan amount.
Some buyers were also misled due to exclusive agreements between dealers and lenders, which prevented them from receiving accurate information about the best finance deals.
How much compensation could victims receive?
The FCA expects average compensation payouts of £700 per mis-sold agreement under the new proposals. The total compensation cost could reach approximately £8.2 billion.
Individual compensation amounts will vary depending on the extent of harm suffered. For some customers, especially those with changed contact details, payments could take several months to be processed.
What do victims need to do to claim compensation?
Complaints have already been made concerning four million finance agreements; these customers do not need to take further action.
The FCA advises anyone who has not yet complained to contact their car loan provider directly, rather than using third-party claims management companies.
Motorists are also cautioned to watch for scammers impersonating car finance lenders offering fraudulent compensation.
The FCA has published guidance on how to submit complaints.
Regulators have warned claims management companies and law firms involved in motor finance commission claims to ensure consumers do not have multiple representatives for the same claim and are not charged excessive termination fees.
When will drivers receive compensation and who will pay?
The FCA initially aimed for the compensation scheme to be operational by early 2026, with prompt payments thereafter. However, delays and extended consultations following lender pressure have postponed this timeline.
A concession now allows for a three to five-month implementation period before lenders must contact potentially eligible customers.
Compensation payments could be further delayed if lenders mount legal challenges. Lenders have 28 days to file a legal challenge to a tribunal, which may escalate to a higher court before payouts commence.
The industry is expected to bear the full cost of the compensation scheme, including administrative expenses.
Several major UK banks and specialist motor finance firms have already allocated billions of pounds for potential payouts.
"We don't recognise losses on that scale," said Adrian Dally, director of the Finance and Leasing Association, the body representing the lending industry. He added that the number of people the regulator claims lost out "seems implausibly high" and suggested the FCA was "overcompensating."
The Supreme Court reviewed three test cases before ruling. The focus was on whether car dealers had a duty to act in their customers' interests rather than their own.
The upheld test case involved Marcus Johnson, who purchased his first car, a Suzuki Swift, in 2017.
In Johnson's case, the Supreme Court found the finance deal terms unfair due to the size of the commission payment and the fact he appeared to have been misled about the relationship between the finance firm and the dealer.
