The Financial Conduct Authority (FCA) has released details of its compensation scheme for millions of people mis-sold car loans following a lengthy consultation period.
Around 12 million drivers are now in line for a payout, after a systemic issue which saw them mis-sold car finance deals usually due to hidden commission arrangements.
Each will receive an average payout of £830, the regulator has confirmed, and should be contacted before the end of 2026.
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 1.
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.
Those affected do not necessarily need to put in a complaint, but the FCA has confirmed that those who have already done so will likely receive compensation sooner.
People who believe they may have been affected but are not contacted have been given until 31 August 2027 to complain to their firm.
In an update earlier in the month, the City watchdog said it had received 1,000 responses to its proposals for a compensation scheme, which has received some backlash from the lending sector since the plans were first revealed.
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.
The scheme will cover car finance agreements taken out between 6 April 2007 and 1 November 2024, with around 44 per cent of deals made in this time thought to be expected.
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 previously said.
This is because some companies ‘discretionary commission arrangements’ with brokers gave them the power to adjust customers’ interest rates on Personal Contract Purchase (PCP) and Hire Purchase agreements.
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.
In a separate update on Monday, the FCA said it was launching a taskforce to to crack down on “poor practice” around car finance claims by some claims management companies and law firms.
Alison Walters, director of consumer finance and FCA taskforce lead, said: “Our scheme will be free and people don’t need to use a CMC or law firm. Should they decide to do so, it’s important that they can trust CMCs and law firms to act in their best interests. This taskforce will ensure we deal with problems quickly and decisively.”
