A redress scheme to compensate car finance customers for undisclosed commissions has moved a step closer after the Financial Conduct Authority (FCA) suggested this was its most likely route.
The City watchdog has been investigating the car finance market since last year.
The car finance saga relates to hidden, unfair commission that lenders and dealers took from customers before 2021.
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The FCA had banned discretionary commissions on the sale of car loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) in January 2021. But the City watchdog intervened last year after it received what it described as a "high number" of complaints from customers about car loan sales made prior to the ban.
It has told lenders to pause investigating complaints until December 2025 while it looks into the wider sector.
But the FCA said this morning (11 March) that it is likely to consult on a redress scheme for mis-sold customers.
Major UK bank Lloyds has already set aside more than £1 billion in potential redress. It is a significant provider of car finance through its Black Horse brand.
Even the Treasury has now raised concerns that firms could legally reduce their corporation tax bills by offsetting compensation payments to customers who were mis-sold car loans between 2007 and 2021.
Other banks have also made provisions, with Barclays setting aside £90 million and Santander £295 million.
What is the FCA motor finance market review?
The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.
But the City watchdog was concerned at the level of complaints that firms are rejecting about the issue, which are later being upheld when challenged through other channels.
It said firms are rejecting most complaints because they consider that they have not acted unfairly, nor caused their customers loss based on the applicable legal and regulatory requirements.
However, the Financial Ombudsman Service (FOS) has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints. Claims have also been brought in the county courts, some of which have been upheld.
The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.
It launched the motor finance market review in January 2024.
The FCA has used its powers to pause all complaints about DCAs until 4 December 2025 as it reviews the sector and these sales more widely.
What is the FCA motor finance market review?
The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.
But the City watchdog was concerned at the level of complaints that firms are rejecting about the issue, which are later being upheld when challenged through other channels.
It said firms are rejecting most complaints because they consider that they have not acted unfairly, nor caused their customers loss based on the applicable legal and regulatory requirements.
However, the Financial Ombudsman Service (FOS) has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints. Claims have also been brought in the county courts, some of which have been upheld.
The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.
It launched the motor finance market review in January 2024.
The FCA has used its powers to pause all complaints about DCAs until 4 December 2025 as it reviews the sector and these sales more widely.
How would a car finance redress scheme work?
A car finance redress scheme could work in a similar way to the payment protection insurance (PPI) scandal where customer complaints must be considered and there will be rules on the levels of compensation.
Under a redress scheme, lenders would be responsible for determining whether customers have lost out due to the firm’s failings. If they have, the lender would need to offer appropriate compensation. The FCA would set rules firms must follow and put checks in place to make sure they do.
The regulator said a redress scheme would be more simple for consumers than bringing a complaint.
It said: “We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive. It would also be more orderly and efficient for firms than a complaint led approach, contributing to a well-functioning market in the future.”
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