Millions will get £700 payouts from car finance scandal, as FCA reveals compensation details

Millions of consumers could be eligible for £700 payouts after the City watchdog set out compensation plans for the car finance scandal. 

The Financial Conduct Authority said payouts to people who were sold unfair loans could start next year. 

It said banks could be forced to pay back £8.2billion to consumers, with motorists ‘being compensated an average of around £700 per agreement’.

The scheme will cover motor finance agreements taken out between April 2007 and November 2024, where commission was paid from the lender to the broker. 

The FCA said that 14.2million agreements – 44 per cent of those made during the period – were likely to be considered unfair. Some motorists may have had multiple agreements during the period and could get more than one payout.

Nikhil Rathi, chief executive of the FCA, said: ‘Many motor finance lenders did not comply with the law or the rules. 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.’ 

The FCA expects around 85 per cent of eligible consumers will take part in the scheme, but that ‘in the very unlikely event of 100 per cent take-up, firms would owe up to £9.7bn in redress’. 

The FCA revealed details of car finance compensation – estimated to be £700 per agreement

The scandal, which has been nicknamed ‘PPI on Wheels’, is focused on ‘secret’ commissions paid by lenders to car dealers as part of a personal contract purchase (PCP) and hire purchase (HP) agreements between 2007 and 2021.

The scandal centres on the way commissions were paid for selling finance deals to their customers. In some cases, the salesmen were paid discretionary commissions meaning they earned more if motorists were charged higher borrowing costs.

Such discretionary commissions were banned in January 2021. But last year the FCA said it was reviewing the past use of such arrangements amid concerns that they had not been properly disclosed to customers.

A separate court case linked to the practice ended up at the Supreme Court earlier this year. Its ruling averted the worst case scenario for lenders that compensation levels might be comparable to the payment protection insurance (PPI) scandal that cost banks £50 billion. 

In August, the Supreme Court judges ruled on car finance^[1], saying that being unaware of commission was not enough to count as mis-selling, but added that car owners could still claim if they met certain conditions.

Following that judgement, the FCA said it would look into launching a redress scheme and today revealed details of this.

The FCA advised people to submit their own complaint using a template letter on its website

Mr Rathi said: ‘On such a complex issue, not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. 

‘That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.’

Lenders have already set aside billions to cover the cost of compensation claims, with Lloyds Banking Group making a provision if £1.15 billion, Santander UK £295 million and Close Brothers £165 million.

The episode has also drawn in Chancellor Rachel Reeves, who has been trying to persuade regulators to be more growth friendly.

In particular, the government has been keen to avoid undue disruption to an industry that finances the purchases of millions of vehicles every year.

How car finance compensation will work

The Financial Conduct Authority says: ‘The scheme would cover motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker. 

‘Those who are concerned they weren’t told key details about their motor finance arrangement – for example, about commission payments – should complain to their lender now if they haven’t done so already.

‘Four in 10 (41 per cent) of those who’ve had motor finance agreements and know about possible compensation are unaware they needn’t use a claims management or law firm to make a claim. 

‘However, there’s no need as people can submit their own complaint using a template letter on the FCA’s website^[2]. Those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed.

‘Once the proposed scheme goes live, lenders will contact those who have already complained. If they don’t hear back after one month, lenders will assume they should review the case.

‘Those who have already complained before the scheme gets up and running are likely to receive compensation faster.

‘Those who haven’t complained will be contacted by their lender within sixmonths of the scheme starting. People will be asked if they want to opt-in to the scheme to have their case reviewed. They’ll have six months to decide.

‘Those motor finance borrowers who don’t receive a letter – for example, because lenders no longer have their details and can’t trace them – will have a year from the scheme starting to make a claim. 

‘They will be able to do so by making a claim to their lender directly. If consumers don’t know who their lender was, there’s information on how to check on the FCA website. The FCA will run an advertising campaign to raise awareness of the scheme.

‘People will only receive compensation under the scheme proposed if they weren’t told details of at least one of three arrangements between the lender and the broker who sold the loan, often a car dealer, which are found in some motor finance agreements:

1. A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.

2. A high commission arrangement (35% of the total cost of credit and 10% of the loan).

3. A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.

‘There could be rare circumstances in which a lender may be able to show that even if one or more of these features was undisclosed, that there was no unfairness. Where evidence is missing about what was disclosed, lenders must presume that they didn’t give borrowers enough information.

‘Consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case. However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with less. The FCA’s scheme is also likely to be faster and simpler than going to court.’