The United Kingdom’s Financial Conduct Authority (FCA) has announced final details of a £7.5 billion (AUD$11.6 billion) compensation scheme for motorists affected by mis-sold car finance deals, with 12.1 million finance agreements eligible for payouts.
The scheme covers finance agreements made between 2007 and 2024, with affected consumers receiving an average of £829 (AUD$1,285) in compensation. The total cost assumes 75 per cent of eligible customers make claims.
FCA chief executive Nikhil Rathi says the scheme will put billions back into consumers’ pockets while allowing the industry to move forward.
“We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5 billion back into people’s pockets,” Rathi says.
“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure.”
The scandal centres on ‘hidden commissions’ paid by lenders to car dealers for selling finance packages to customers. In some cases, dealers received higher commissions for selling more expensive finance deals, creating conflicts of interest.
Scheme details and timeline
The number of affected agreements has been reduced from the FCA’s initial estimate of 14 million, but average compensation has increased from the original £695 (AUD$1,077) estimate. The watchdog says eligibility criteria have been tightened while average compensation has been increased for older agreements.
Interest will be paid on compensation, and the FCA will cap payouts in about one-third of cases “to ensure no one is put in a better position than had they been treated fairly”.
The scheme will begin on 30 June 2026 for loans taken out after 1 April 2014, and on 31 August 2026 for earlier loans. Consumers have until the end of August 2027 to make claims.
Eligible agreements include those with Discretionary Commission Arrangements, which allowed brokers to adjust loan interest rates to earn higher commissions, and “high commission arrangements” of at least 39 per cent of the total cost of credit.
Industry provisions and reaction
Major UK lenders have already set aside billions to cover their estimated exposure to the compensation scheme. Lloyds Banking Group has provisioned £1.95 billion (AUD$3.02 billion), Santander has taken a £478 million (AUD$741 million) hit, Barclays has allocated £325 million (AUD$504 million), and smaller lender Close Brothers has made a £300 million (AUD$465 million) provision.
The banking sector has been critical of the scheme’s scope and methodology. Lloyds has stated it does not believe the scheme “reflects the actual loss to the customer”.
Close Brothers chief executive Mike Morgan recently told media: “You knew what you were paying for this car and you got the car. The customer got value throughout this.”
Shore Capital banking analyst Gary Greenwood says the FCA faces a delicate balancing act in designing the scheme.
“Should the FCA proceed with its original proposals largely unchanged, we think there is a meaningful risk of a judicial review, which could delay implementation by a further 12–18 months,” Greenwood says.
“Conversely, if the scheme is diluted too aggressively, there is a risk that claimants opt out of the FCA process and instead pursue lenders directly through the courts.”
Claims process
The FCA has warned consumers to avoid claims management companies and use the official scheme directly. Affected customers should write to their lender to start their claim, with lenders having three months to respond with compensation details.
The watchdog has published guidance at fca.org.uk/carfinance, including template complaint letters and a list of participating lenders.
Rathi defended the scheme approach as avoiding an extended legal saga that could prove “very expensive” and “run for many years” while failing to provide timely compensation for consumers or certainty for investors.
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