More than 12 million drivers have been told how they can receive an average £830 payout after being subject to a widespread practice of car finance mis-selling that lasted nearly two decades.
The Financial Conduct Authority (FCA) has released details of its scheme, revealing how those affected will benefit from a payout pot set to cost lenders £7.5 billion.
Firms have been ordered to make payouts after mis-selling car finance deals due to failing to disclose important information to customers, which in most cases were hidden commission arrangements.
There will be two schemes, one for agreements made between 6 April 2007 and 31 March 2014 (Scheme 1), and one for those made between 1 April 2014 and 1 November 2024 (Scheme 2).
An implementation period has been set for firms to prepare to meet the deadlines set, with most having up to 30 June 2026 for those on Scheme 2, and 31 August for those on Scheme
The FCA estimates that firms will pay redress of £7.5 billion. The total bill to firms including non-redress costs is expected to be £9.1 billion.
Who is eligible for compensation?
Motor finance firms and lenders broke the law and FCA rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, the regulator has said.
As a result, many motorists did not have the opportunity to negotiate or find a better deal and therefore may have paid a higher interest rate for their loan.
Because these brokers earned more commission on higher rates, this also created an incentive to maximise the rate given. An estimated 40 per cent of car finance deals were thought to be affected by the issue.
It has now laid out exactly what circumstances will make someone eligible for a payout.
In most cases, it will be where there was a discretionary commission agreement (DCA), where the broker could adjust the interest rate offered to a customer to obtain a higher commission.
Also included will be high commission arrangements, worth at least 39 per cent of the total cost of credit and 10 per cent of the loan.
Finally, deals where contractual ties that gave a firm exclusivity or right of first refusal – unless the lender can prove there were visible links between the lender, manufacturer, and franchised dealer – are in scope.
There will be some notable exceptions. Cases will still be considered fair if:
- The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less after that date.
- The borrower wasn’t charged interest.
- The DCA wasn’t used to earn additional commission.
- The lender can prove it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss.
Do I need to apply?
Those who believe they are affected do not need to act, but may receive their compensation sooner if they do. Those who have already complained will receive theirs the soonest, the FCA has confirmed.
The FCA advises that people submit a complaint to their lender using a template letter on its website.
David Geale, the FCA’s executive director, payments and digital finance, said that the regulator’s position remains: “If you’re concerned, complain now”.
People who believe they may have been affected but are not contacted have been given until 31 August 2027 to complain to their firm.
The FCA has estimated an uptake of 75 per cent. In the unlikely case that all customers were to successfully apply for compensation, this would cost lenders an estimated £10 billion.
How much could I be compensated?
The average payout is expected to be £830, the FCA has confirmed.
The regulator has said that only a “small number” of cases will receive redress of commission plus interest.
In all other cases, consumers will receive the average of estimated loss and the commission paid, plus interest. This has been termed the ‘hybrid’ remedy, and will have several caps in place.
This has been done to “ensure consumers receiving the hybrid remedy are not compensated more than had they been treated fairly or than those who suffered the most unfairness,” according to the FCA.
When will I be compensated?
The FCA has estimated that payouts could begin by the end of the year, and many throughout 2027. Those who have not already complained are more likely to receive their compensation by the end of 2027.
Nikhil Rathi, CEO of the FCA, said: “There’s nothing stopping lenders moving now … now that they’ve seen the rules of the scheme,” adding: “I don’t think that’s likely.”
Firms have been told by the FCA that they must to identify and contact people who have been affected and ask if they want to opt in to receive redress. Lenders will have three months from the end of the implementation period to do this.
This means that most should people affected should have at least been contacted by December 2026.
