14m car finance customers could get payouts under FCA compensation scheme

Financial watchdog proposes payouts averaging £700 after finding nearly half of all motor loans since 2007 were unfair

Millions of drivers could soon receive compensation for unfair car finance deals under a new redress scheme proposed by the Financial Conduct Authority (FCA).

The watchdog estimates that around 14.2 million finance agreements – 44% of all loans made since 2007 – were unfair, and that payouts could begin as early as next year. Many lenders and brokers failed to disclose key commission arrangements, meaning customers paid more than they should have over the life of their loan.

The FCA’s chief executive, Nikhil Rathi, said: “Many motor finance lenders did not comply with the law or the rules.” Announcing details of the redress scheme following August’s Supreme Court ruling, he added: “Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”

Consumers are expected to receive an average of £700 per agreement. The FCA hasn’t confirmed the details of the maximum payouts that could be owed to consumers but has said there will be a “wide range”. It has previously said that some cases could reach up to £950, depending on the size of the commission and the length of the loan.

The FCA expects total payouts to reach £8.2 billion, based on an estimated 85% of affected consumers coming forward to claim compensation. Overall costs to lenders – including administration – would rise to around £11 billion if the scheme goes ahead as planned.

The FCA’s proposed scheme could finally bring justice for millions of consumers after years of uncertainty for drivers. Consumer Voice co-founder Alex Neil said:

“This is a pivotal moment for the regulator, as compensating the millions of victims of the car finance scandal is long overdue. We will be scrutinising the consultation closely to assess whether, in its current form, it will deliver fair compensation. The regulator must ensure that consumers’ voices are heard in shaping the scheme.”

Did you take out car finance between 2007 and 2024?

The FCA is urging anyone who hasn’t yet acted to complain now, to ensure they are first in line once the scheme begins. So, everyone who has had car finance since 2007 needs to act now to act now if they haven’t already.

Use our free tool to understand what you need to do now. We’ll give you access to our free template letters to help you complain, and send you alerts to help you through the process of getting back what you’re owed.

FCA finds widespread unfairness in motor finance

According to the FCA, unfairness arose because lenders and brokers failed to disclose key details about how commissions were paid. This meant consumers were often charged higher interest rates so brokers could earn more commission – a practice banned since 2021.

Under the proposed scheme, a loan would be considered unfair where a lender or broker failed to properly disclose one or more of the following:

• A discretionary commission arrangement (DCA) – allowing brokers to increase your interest rate for more commission.
  
• A high commission arrangement – where commission was equal to or greater than 35% of the total cost of credit and 10% of the loan value.
  
• A tied arrangement – where a lender had exclusive or near-exclusive rights to offer finance through a specific broker or dealership.

The FCA’s analysis has found that these undisclosed arrangements directly inflated borrowing costs. For example, loans with a 10% interest rate typically should have been closer to 8.3%, meaning consumers paid around 17% more than they should have.

How compensation will be calculated

The FCA proposes two main approaches to redress, depending on the type of loan and the commission structure:

• Rare but high-value cases: Consumers whose loans closely match the Johnson Supreme Court case – the FCA defines these as cases involving a contractual tie and a commission of at least 50% of the total cost of credit and 22.5% of the loan – would receive repayment of the full commission plus interest.
• All other unfair cases: Consumers would receive compensation based on the average estimated loss, calculated from independent economic analysis of how interest rates were inflated by DCAs and similar structures.

In both cases, the FCA has said simple interest would be added at the average Bank of England base rate per year plus 1% – around 2.09% on current estimates – from the date of overpayment until the date compensation is paid. Consumers who believe this is unfair could challenge it with evidence.

How the scheme will work

If approved, the FCA’s redress scheme would apply to motor finance agreements entered into between 6 April 2007 and 1 November 2024 where commission was paid by the lender to the broker.Here’s how it would operate:

• Consumers who’ve already complained will be contacted first once the scheme starts. You will be automatically included, unless you contact the lender to say otherwise. If they don’t respond within one month, lenders must review their cases automatically.
• Those who haven’t complained will be contacted within six months of the scheme launch and asked if they wish to opt in. They’ll have six months to decide.
• Uncontacted consumers – for example, if lenders no longer hold their contact details – will have 12 months to make a claim directly.
• If consumers disagree with their lender’s decision, they can escalate their case to the Financial Ombudsman Service.

The FCA expects 85% of eligible consumers to take part. At that level of participation, lenders would owe around £8.2 billion in redress. If all eligible consumers claimed, payouts could rise to £9.7 billion; if only 70% participated, total redress would fall to around £6.8 billion.

Compensation scheme will be “faster, simpler and fairer”

The FCA scheme could be one of the largest consumer compensation exercises in UK history and comparable in scale to PPI.

The FCA has said that without this scheme, millions of complaints could clog up the courts and Ombudsman service, delaying justice for consumers and driving up costs for lenders.

The FCA says its plan will provide a simple, free and efficient route to redress, ensuring that those affected are compensated fairly and that the motor finance market can “draw a line” under years of uncertainty.

What drivers should do now

1. Complain now – don’t wait for the scheme to start

If you took out a car finance loan between 2007 and 2024, you should complain to your lender immediately if you haven’t already done so. The FCA has confirmed that early complaints will be prioritised once the scheme launches.

2. Complain again if you’ve had a previous complaint rejected

If you have previously complained about car finance commissions and had this rejected by the lender, you will need to complain again to be automatically included.

3. Keep your documents

Hang onto your finance agreement, dealer paperwork and any correspondence. You may need these later to confirm eligibility or prove your complaint was made before the scheme began.

4. Check if you’re eligible

If you’re unsure who your lender was, the FCA’s website explains how to check. Anyone whose loan involved a broker, car dealer or lender commission should assume they may be affected.

The questions you need to ask your lender include: Did my broker or dealer receive commission? Was I told about it? How was my loan interest rate decided?

Use our tool to check whether you could be eligible and, where you are, we will provide you with free template letters to make complaining easy.

You don’t need to pay someone to claim compensation

The FCA has warned consumers not to use claims management or law firms, which can take a cut of your compensation.

This ignores the fact that many consumers who turned to lawyers did so only because the FCA failed to act sooner – after banning discretionary commission in 2021, the FCA failed to secure compensation for affected borrowers.

More than 3.8 million consumers have already signed up with law firms over mis-sold car finance, representing over 7.8 million claims, or roughly two per person. And that’s just from six of eleven law firms willing to share data with us; the true number is almost certainly higher.

If you have complained already using a CMC or law firm, lenders must still write to you about being part of the scheme, and it will be for you to decide whether or not to opt out of the scheme. Under FCA and SRA rules, your law firm must also tell you about free alternatives before you sign.

You can exit an agreement at any time, and any fee on exit must be reasonable and reflect only the work actually done.