Car finance scandal: Why millions of consumers could receive £700 average payout per claim
Compensation payouts on around 14m unfair motor finance deals could start next year, at an average of about £700 each, under the UK financial watchdog’s proposed scheme.
The Financial Conduct Authority (FCA) estimated its redress scheme could cost lenders £8.2bn in compensation, based on about 85 per cent of eligible consumers taking part.
The figure rises to £9.7bn if all eligible consumers are compensated, which it said was very unlikely.
The FCA had previously estimated lenders could foot a bill totalling between £9bn and £18bn.
It also said before that drivers could receive less than £950 in compensation per motor finance deal, but it has now confirmed payouts are likely to average at about £700.
Some four million car finance deals are estimated to have already been subject to a complaint – leaving around ten million which still could be raised.
Consumers could have had more than one car loan that is eligible for compensation.
Motor finance firms broke the law or its rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, the regulator said.
This meant that 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.
The watchdog has been looking into data from across some 32 million agreements made between 2007 and 2024.
About 44 per cent of those will be considered unfair and will qualify for compensation under the FCA’s proposals.
It believes setting up a free compensation scheme will make it easier for customers to access, and more cost-effective for firms by removing many of the legal and administrative work.
The proposals come after a Supreme Court ruled in August that lenders were not liable for hidden commission payments on car finance agreements.
Nikhil Rathi, the FCA’s chief executive, 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.
“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated.
“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.”
Most of the car finance deals covered by the scheme involve so-called discretionary commission arrangements (DCAs).
This refers to arrangements whereby brokers, including car dealers, were able to increase interest rates on car loans so they could get more commission. The FCA advises any consumer who thinks they may be eligible for compensation to contact their lender or broker if they haven’t already done so.