FCA car finance compensation: millions of drivers to get around £830 each

Drivers will start getting compensation for mis-sold car finance in the coming months, the Financial Conduct Authority (FCA) has said.

The average amount of compensation will be around £830 per motor finance contract, the FCA said. This is higher than the £700 initially announced. However fewer contracts will be eligible – with 12.1 million motor finance agreements instead of around 14 million falling under the redress scheme. Only contracts signed between 2007 and 2024 are eligible.

The industry-wide compensation scheme comes amid evidence finance firms failed to disclose commissions to motorists on car finance agreements. Millions of drivers who unknowingly paid commissions on car finance agreements are now in line for compensation. The FCA estimates 75% of eligible consumers will make a claim. If so, the total redress paid would be £7.5 billion.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

This is less than the around £8 billion the regulator previously calculated and around £6 billion lower than if everyone entitled to claim went through the Financial Ombudsman or courts instead, it said. However the FCA’s scheme is generally considered much easier and quicker to use.

The FCA has made several changes to the free-to-use scheme in response to conflicting feedback  from consumers, their representatives, firms, manufacturers and industry bodies to ensure “it is fair for consumers and proportionate for firms”, the regulator said.

The eligibility criteria have been tightened, average compensation increased for older agreements and a minimum 3% compensation interest rate per year applied. Payouts will be capped in around one in three cases, which the FCA said was “to ensure no one is put in a better position than had they been treated fairly”.

Nikhil Rathi, chief executive of the FCA, said:  “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.  

“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. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”

How does the FCA’s motor finance scheme work?

Motor finance loans taken out between 6 April 2007 to 1 November 2024 are covered by the FCA’s compensation scheme.  

Firstly, firms that need to compensate drivers will be given a short implementation period to prepare for the claims process. This will be up to:

• 30 June 2026 for motor finance loans taken out from 1 April 2014
• 31 August 2026 for those agreed earlier 

Motor finance lenders will then have three months from the end of the implementation period to inform drivers whether they’re owed compensation and how much. Drivers who have already complained, or who complain before the end of the relevant implementation period, will be compensated sooner, so it is worth getting your complaint in early if you believe you have a valid claim.

Lenders will only actively contact people who haven’t complained if they are likely to be owed money and they have six months from the end of the implementation period to do so.

This avoids unnecessary and potentially confusing communication with people who won’t get compensation, the FCA said. Anyone who is not contacted has until 31 August 2027 to make a claim themselves.  

However, claims for high value loans –  amounts higher than 99.5% of other loans that year – are not covered by the FCA’s scheme, which is designed for the mass market. But these drivers can still complain to firms and the Financial Ombudsman Service if they think they have a valid claim.   

Will I get compensation for motor finance?

Drivers will only be compensated if they were not told clearly that either:

1. Their dealer or broker set the loan interest rate to earn more commission (using a discretionary commission arrangement (DCA).
2. The commission was high – at least 39% of the total cost of the credit and 10% of the overall loan.
3. The dealer or broker was using one lender or gave one lender the right of first refusal, (a so-called tied arrangement) – except where lenders can show there was a clear relationship with a manufacturer and franchised dealer. For example, where they shared a common or similar name.

There will be some exceptions, with cases considered ‘fair’ and not due compensation, if:  

• The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date. Commission amounts below those levels are unlikely to have influenced the broker’s behaviour or consumer’s decision, the FCA said.
• The borrower wasn’t charged interest.  
• The DCA wasn’t used to earn discretionary commission.
• The lender can prove, in certain limited circumstances, it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss. For example, if no better deal was available.

However where the commission was very high – 50% of the total cost of credit and 22.5% of the loan – and another relevant factor of unfairness existed, consumers will receive the commission paid.

How much motor finance compensation will I get?

The FCA has said drivers can expect around £830 compensation per motor finance agreement.

For most people, compensation will be made up of two parts, the average of:

• The commission paid; and
• The estimated loss, based on a percentage discount of the interest (APR) they paid – 17% for cases from April 2014 and 21% for earlier agreements, to reflect greater loss then. 

To avoid drivers being put back in a better position than they would have been had they been treated fairly, compensation will be capped in around one in three cases.

Interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year.  

What if the motor finance firm ignores my complaint?

The FCA has established a dedicated supervisory team, led by a director, to monitor if firms are meeting the scheme's rules and act if they’re not. If people disagree with their firm's decision, they can complain to the Financial Ombudsman, which will be able to assess whether the FCA scheme rules have been followed. 

The FCA has also joined with the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority to launch a taskforce to tackle poor handling of motor finance claims by some claims management companies (CMCs) and law firms.

There’s no need to use a law firm or claims management company – people can submit their own complaint using a template letter on the FCA’s website. Those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed, the regulator warned.

The FCA has already removed or amended 800 misleading adverts, over 28,000 consumers have been able to exit contracts free of charge, and three CMCs reduced their high fees, protecting over 500,000 consumers.

What is motor finance compensation for?

Motor finance companies are being forced to pay up because the FCA found they broke laws and regulations in force at the time by failing to disclose important information about the finance deals they sold car buyers.

This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan.

The FCA said its proposed industry-wide compensation scheme is “the best, most efficient way of getting compensation to those owed it”, adding it would make it simpler for those who would otherwise struggle to claim.

It has previously warned motorists about scam car finance compensation calls, for example, and about using unnecessary and expensive claims management companies (CMCs).

Can I go to the Financial Ombudsman instead?

The FCA will monitor if firms are meeting the proposed scheme’s rules and will act if they’re not. If people disagree with their firm’s decision, they can ask the Financial Ombudsman to assess whether the scheme rules have been followed.

Those with a motor finance complaint about inadequate disclosure of a commission or tie that doesn’t fall within the three criteria – and who are therefore not owed compensation under the proposed scheme – would only get a different outcome from the Financial Ombudsman if it decides the scheme rules weren’t followed.

People in this situation could still make a claim in court if they believed they had lost out.

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.

I think I have a valid motor finance claim – what should I do?

If you are concerned you were treated unfairly, make a complaint. People who complain before the relevant implementation period ends will be compensated sooner.  

There is information on how to complain for free on the FCA website. There is no need to use a claims management company or law firm. If you do, you could lose over 30% of any money you get.  

If you don’t complain and are owed money, your lender should contact you by end of 2026 for post 1 April 2014 agreements and end of February 2027 for agreements that started between 6 April 2007 and 31 March 2014.

Watch out for scams. You can check you are dealing with your genuine lender using the contact details listed on the FCA website. You shouldn’t pay a fee to access compensation, or share sensitive details such as your PIN or online banking details.