The Financial Conduct Authority (FCA) has confirmed that lenders can make early compensation offers to drivers mis-sold car finance while legal challenges delay its industry-wide redress scheme. New guidance, published on Tuesday (November 3), sets out expectations for firms offering compensation before the outcome of court proceedings scheduled for February 2027.
Barclays has already confirmed it is making early settlement offers to some customers who previously complained about commission arrangements on their motor finance agreements. The regulator's research found that 89 per cent of car finance customers who have complained, or are considering doing so, want the option of receiving compensation now rather than waiting for the legal challenges to conclude.
Customers Want Compensation Sooner
The FCA also found that 77 per cent believed receiving compensation sooner would make a great deal or fair amount of difference to their financial circumstances. However, the regulator has made clear that customers are under no obligation to accept an early settlement offer and can wait for the outcome of the legal proceedings.
Stephen Braviner Roman, the FCA's general counsel, said: "Anyone who wants to wait can, and there's no obligation to agree to the offer." He added: "We'll closely monitor firms making offers and expect them to be clear what accepting an offer means."
New Rules for Early Compensation Offers
Under the guidance, lenders must offer customers at least one month to consider any settlement proposal. Offers must be worth at least the maximum compensation available under the FCA's current redress scheme, based on the customer's individual circumstances. Firms must also provide a clear breakdown showing how compensation has been calculated and explain the consequences of accepting the money.
Accepting an offer would normally mean the customer could not claim additional compensation later, even if the outcome of the legal challenge resulted in higher payments. However, customers would also be allowed to keep the full amount received if the eventual compensation scheme resulted in lower payouts. Those who reject an offer can wait for the outcome of the legal proceedings, although they cannot currently refer the settlement offer or underlying complaint to the Financial Ombudsman Service for review.
Lenders Prepare for Early Payments
Barclays, which withdrew from the motor finance market several years ago, has set aside approximately £325 million to cover potential compensation costs. Meanwhile, Lloyds Banking Group, which operates through its Black Horse motor finance business, has set aside £1.95 billion but has not yet started making early settlement offers.
Harry Charalambous, Principal at banking and credit advisory consultancy Broadstone, said the FCA's announcement provided clarity for lenders considering early payments. He said: "Lenders have been considering making early settlement offers but have been reluctant to move ahead without a clear signal from the regulator. With that reassurance now in place, we could see a number of lenders break cover and begin offering compensation ahead of the wider scheme."
He added that firms would need robust systems to identify eligible customers, calculate compensation accurately and communicate clearly about the implications of accepting an offer. The wider FCA compensation scheme remains partially suspended following legal challenges, with the court hearing scheduled for February 2027 and any resulting payments potentially taking several more months. Customers can find further information about the compensation process and their rights through the FCA's car finance claims guidance.
