FCA car finance compensation: redress could be paid this year

Drivers may get compensation for mis-sold car finance this year, the Financial Conduct Authority (FCA) has said.

The City watchdog is consulting on an industry-wide compensation scheme amid concerns that finance firms failed to disclose commissions to motorists on car finance agreements.

Millions of drivers who unknowingly paid commissions on car finance agreements are believed to be in line for compensation of around £700 for each car loan they took out.

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The FCA has been consulting on how a redress scheme would work for the payouts, due to 14 million drivers.

The regulator said it is considering more than 1,000 responses and if it goes ahead, final rules will be published in late March.

Given the scale and complexity of the scheme and in response to feedback, the FCA said it is likely to introduce an implementation period of three months, with up to five months for older agreements. Firms could choose to process claims under the scheme sooner.

The FCA has also decided that people who complain before the scheme starts should no longer be asked if they wish to opt out. Instead, within three months of the end of the implementation period, their lender would tell them whether they're owed compensation, and how much, the FCA said.

Consumers receiving a redress offer would be able to accept it immediately, rather than waiting for a final determination, while firms would not be required to write to customers via recorded delivery and could choose other secure methods.

Even with an implementation period, streamlining the process means millions of people would receive compensation in 2026, the FCA said.

Based on the number of consumers the FCA estimates could take part, lenders could pay out £8.2 billion in compensation, the regulator said, far below its initial estimates of £18 billion.

Matt Crole-Rees, motoring expert at Confused.com, said: “We know many drivers have been waiting for clarity, so any move to make the compensation process smoother and more efficient will be welcome news. By introducing an implementation period, firms have time to prepare properly, while a more streamlined claims journey should mean motorists receive any money owed this year, with fewer delays or hurdles.

“Drivers who think they may have been affected should consider complaining directly to their lender now, the FCA advises. There’s no need to use a claims management company, and doing so could mean losing a significant portion of any compensation in fees.”

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).

The FCA said it has cracked down on poor practice by FCA-regulated CMCs. More than 800 misleading adverts have been removed or amended since January 2024 and it has intervened with 5 CMCs causing harm. As a result, two reduced exit fees and four agreed to stop taking on new clients until they can show they comply with the rules.

Almost half of those aware of possible compensation, but who had not yet made a claim, (46%) said a lack of clarity on whether a claim would be eligible was a barrier to pursuing one, according to research commissioned by the FCA.

However, 81% of those who were considering making a claim said a compensation scheme would give them the confidence to do so.

The FCA has launched a consultation on its proposed scheme, where consumers as well as the motor finance industry can feed back their thoughts.

Richard Pinch, senior risk director at financial services consultancy Broadstone, said the FCA appears to have listened to the lenders’ calls for more time by extending the consultation deadline.

Pinch said: “It is clear that collecting and analysing market data is already proving to be a challenging exercise for lenders demonstrating the immense complexity of implementing such a compensation scheme.

“The consultation has provoked concern throughout the motor finance market and it is likely that lenders and other firms representing the market will request significant changes to be made to the final rules.”

How the FCA’s motor finance scheme would work

The FCA’s motor finance scheme would cover motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was payable by the lender to the broker.

Those who are concerned they weren’t told key details about their motor finance arrangement – for example, about commission payments – should complain to their lender now if they haven’t done so already.

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.

Once the proposed scheme goes live, lenders will contact those who have already complained. If they don’t hear back after one month, lenders will assume they should review the case.

Those who have already complained before the scheme gets up and running are likely to receive compensation faster, the FCA said.

Those who haven’t complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt-in to the scheme to have their case reviewed. They’ll have six months to decide.

Those motor finance borrowers who don’t receive a letter – for example, because lenders no longer have their details and can’t trace them – will have a year from the scheme starting to make a claim. They will be able to do so by making a claim to their lender directly.

If consumers don’t know who their lender was, there’s information on how to check on the FCA website. The FCA will run an advertising campaign to raise awareness of the scheme.

Am I eligible for car finance compensation?

People will only receive compensation under the planned scheme if they weren’t told details of at least one of three arrangements between the lender and the broker who sold the loan, often a car dealer, which are found in some motor finance agreements:

1. A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.
2. A high commission arrangement (35% of the total cost of credit and 10% of the loan).
3. A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.

There could be rare circumstances in which a lender may be able to show that even if one or more of these features was undisclosed, that there was no unfairness – but the FCA has said that where evidence is missing about what was disclosed, lenders must presume they didn’t give borrowers enough information.

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.