The Financial Conduct Authority (FCA) has warned that millions of motorists awaiting compensation for mis-sold car finance agreements may not receive payments until at least 2027. The regulator stated that legal challenges against its proposed redress scheme are likely to delay payouts for consumers who were potentially charged hidden commissions on motor finance agreements.
Background on the compensation scheme
The FCA announced earlier this year plans to introduce a redress scheme covering discretionary commission arrangements (DCAs). These arrangements allowed lenders and brokers to increase interest rates charged to customers, earning higher commissions. The watchdog estimates that around 12.1 million motor finance agreements could be eligible for compensation, with average payouts of approximately £829 per agreement.
Legal challenges causing delays
Speaking to MPs on the Treasury Select Committee, FCA deputy chief executive Sarah Pritchard confirmed that legal action against the scheme means payments are unlikely to start before 2027. She stated: "I want to be straightforward that the legal challenge will add delay and extra costs to the scheme as a whole. If the scheme goes ahead, the delay, we believe, will result in payments not before 2027."
The FCA faces four separate legal challenges from firms including Volkswagen and Mercedes-Benz financial services divisions, Credit Agricole's motor finance arm, and consumer group Consumer Voice. The redress scheme could cost the motor finance industry around £9.1 billion.
Potential alternatives
FCA chief executive Nikhil Rathi warned that the scheme could be "struck down in whole or part" by courts, requiring alternative approaches. One option is returning to a complaints-led process where individual claims are assessed separately, which could add £6 billion in costs and take three years. Without a redress scheme, up to 19 million individual complaints might need processing.
The FCA has already spent over £20 million developing the compensation programme and estimates legal challenges will add £2.7 million in costs. Despite setbacks, the FCA is exploring options for some consumers to receive compensation sooner. Ms Pritchard told MPs: "One thing we are exploring is whether there are options for consumers who wish to receive money now. If consumers wish to receive compensation now, we are exploring what the options for that might be."
The proposed scheme relates to DCAs used between April 2007 and November 2024. The FCA will provide further updates once legal challenges are considered by courts.
