Consumer Voice sets out case for fairer car finance payouts
We argue that the regulator has failed to justify compensation rules that could underpay millions of drivers by billions of pounds.
Consumer Voice has submitted its detailed Reply in our legal challenge to the FCA’s car finance compensation scheme.
The more we have seen of how the regulator designed the scheme, the stronger our concern that millions of people could receive less than fair compensation.
We have always supported a nationwide compensation scheme. It remains the only realistic way to put things right for millions of people at scale. We are not challenging the existence of the scheme, who is eligible or the work lenders should be doing now to identify affected customers. Our challenge is focused on the part that decides what people actually get paid.
When we began our challenge in April, we said the FCA’s calculation could undercompensate drivers by billions of pounds. Since then, the regulator has filed its response and disclosed 538 documents about how the scheme was designed.
Those papers show that the FCA’s own economists recommended further work to test losses on older agreements, estimated it would take seven weeks and initially believed it could still be completed within the scheme timetable. The FCA later chose not to do it.
The FCA disputes our case. It says its rules reflect lawful regulatory judgements made after weighing fairness, speed, simplicity and the future of the motor finance market. Our Reply argues that its response and disclosure do not eliminate our concerns. In several important respects, they strengthen them.
Alex Neill, co-founder of Consumer Voice, said:
“The FCA’s own documents show it knew its main payout formula could fail to reflect actual harm, that its evidence could understate losses in earlier years and that its interest rate could leave people short-changed. It didn’t do the work its own experts recommended to make its redress calculations robust and pressed on regardless.
“Consumers were failed once by lenders and brokers. They can’t now be short-changed by the regulator meant to protect them.”
Three lenders are also challenging the scheme, seeking to stop or limit compensation. Consumer Voice is the only applicant arguing that drivers could be paid too little. The FCA has also challenged our right to bring the case, questioning our independence and motives.
Our full Reply has been published on the FCA website. Sign up to Consumer Voice for updates on your rights, your money and ways to get back what you’re owed.
How the FCA’s formula could leave drivers short-changed
Most eligible drivers will not receive compensation equal to all the commission paid by the lender to their dealer or broker. That higher form of compensation is reserved for a very small group of agreements that closely match a single Supreme Court case. For most others, the FCA will average the commission with a separate estimate of how much extra interest the customer may have paid.
The FCA’s own internal papers described this “hybrid” formula as an “arbitrary midpoint” that “will not reflect actual harm”. In one illustration used while the scheme was being designed, average compensation was £864 under the commission-repayment approach, £391 under the FCA’s loss estimate and £627.50 after the two were averaged. The resulting payout was almost £240 lower than the commission-repayment figure because the FCA had split the difference – not because £627.50 had been shown to be a better estimate of what the consumer lost.
The scheme already uses figures from each agreement, including the commission and interest rate. We are not arguing for millions of individual reviews: a nationwide scheme needs standard rules, but the assumptions inside them still need to be credible and properly evidenced.
The FCA knew its evidence on older agreements was weak
The FCA generally applies a standard 17% APR adjustment for later agreements and 21% for earlier ones. It accepted that 17% was likely to underestimate losses on older agreements. It chose 21% by averaging 17 with 26 – even though 26 was not an estimate of consumer loss, but the point at which the hybrid formula would, on average, produce the same compensation as a full commission repayment – and rounding 21.5 down. That change adds just £31 to average compensation for an agreement taken out before April 2014.
The FCA’s own economists recommended getting fuller loan-level data going back to 2007 so the calculation would be more representative of what consumers had actually lost. The FCA estimated that work would take seven weeks – and, when the recommendation was made in January, said it could still be completed within its timetable to publish the scheme in March. But after repeatedly delaying a decision, it chose not to obtain the data, citing the impact on its timetable.
Standard rules may be practical, but the numbers they’re based on still need to reflect what people lost. Our Reply argues that the FCA effectively ran itself out of time and then prioritised its self-imposed deadline over getting the evidence needed for a more robust calculation.
The interest rate could leave people short again
Compensatory interest is meant to recognise the years someone was without money that should have remained in their pocket. If overpaying meant using a credit card, an overdraft or other borrowing, the real cost may have been far higher than the Bank of England base rate. Our research found the cost of car finance put real pressure on household finances: 19% struggled to pay everyday bills, 13% had to rely on more credit and 10% borrowed from friends.
Under the scheme, interest is calculated at the base rate plus 1%, with a minimum of 3% in any year. The FCA’s own analysis found that base rates had been abnormally low for much of the period and were not closely linked to what consumers actually paid to borrow. It also recognised that many people – particularly those with weaker credit histories – would have faced much higher rates.
The FCA considered using an 8% rate and accepted that it would better reflect consumers’ financing costs. It rejected it partly because it would add £3.96 billion to firms’ redress bill. An internal assessment also acknowledged that there was “no strong policy justification” for choosing a 3% floor and that the figure was not grounded in a precise analysis.
The FCA originally proposed allowing consumers to show that their real loss was higher, saying this was needed “to ensure fairness”. It later removed that safeguard after lenders raised significant concerns about the operational burden. Consumers must now accept the standard rate even where it leaves them short, with the FCA itself recognising that vulnerable consumers could be particularly disadvantaged.
We are challenging this as both unlawful and unfair.
Market integrity means more than limiting firms’ bills
The FCA says it had to consider what higher compensation would mean for lenders, competition and the future availability of car finance. Those are legitimate questions. But market integrity cannot be reduced to whether firms can absorb the bill.
It also means that firms follow the rules, that serious misconduct has consequences and consumers can trust both the market and the regulator responsible for it. The FCA now accepts that consumer confidence, compliance with the law and fair regulatory responses form part of market integrity. But its documents show that reducing firms’ exposure was central to its assessment, without equivalent consideration of whether fuller compensation would rebuild trust or encourage better conduct.
The FCA’s own analysis found that the impact on the market remained within a tolerable range under the different compensation options. But its cost-benefit analysis mainly compared the compensation scheme with doing nothing – not the chosen scheme with one providing fairer and fuller redress. This was criticised by the FCA’s own academics reviewing this work who stated more emphasis should have been placed on consumer protection.
Trust is already fragile. Our research found that only 22% of affected consumers trusted lenders to follow the FCA’s rules when calculating compensation. Just 7% trusted them to provide clear and impartial information about the process.
The consumer voice must be heard
The FCA has also challenged whether Consumer Voice has sufficient interest to bring this challenge . It has questioned our independence, our relationship with our solicitors and our reasons for pursuing the challenge. We robustly reject those claims.
Before we challenged the scheme, the FCA treated Consumer Voice as a trusted expert consumer organisation. It invited us to consumer roundtables, sought our evidence and appointed us to its Consumer Redress Scheme Design Panel.
Consumer Voice has no commercial interest in the outcome of this challenge or in any individual motor finance complaint or claim. We receive no share of consumers’ compensation, no referral fees for motor finance claims and no benefit if compensation is delayed. We made the decision to bring the case because the current rules risk systematically undercompensating consumers and no other consumer organisation had come forward to challenge them.
The FCA cannot treat Consumer Voice as a trusted consumer expert when our evidence is useful, then question our legitimacy when we challenge a decision that could harm consumers. And with three lenders represented before the Tribunal, the consumer case must be heard too.
Our full Reply has been published on the FCA website. The main trial, where the Tribunal will hear our challenge alongside the lenders’ cases, will be listed for either December 2026 or February 2027.
Sign up to Consumer Voice to stay updated on the case and for useful updates on your rights, your money and ways to get back what you’re owed.
