Car Finance Compensation Scheme: How Redress Works and Who Is Eligible
An estimated fourteen million people are due to receive payouts as part of a major compensation scheme for mis-sold car loans. The Financial Conduct Authority (FCA) is finalising its long-awaited redress plan, which could see billions of pounds returned to consumers.
Details of the Compensation Scheme
In an update earlier this month, the City watchdog confirmed it had received one thousand responses to its proposals for the compensation scheme. The plans have faced some backlash from the lending sector since they were first revealed. If the scheme receives the green light, the regulator expects to give lenders three months before they need to start contacting motor finance customers. For older car loan agreements, lenders will have up to five months due to the scale and complexity of the scheme and in response to feedback.
Consumers would then wait up to another three months before being informed whether they are owed compensation and the exact amount. However, the regulator aims to streamline the process by allowing those due redress to accept immediately without waiting for a final determination.
Streamlining the Process
The FCA will also no longer require lenders to ask those who complain before the scheme starts if they wish to opt out. Additionally, lenders will not need to contact customers by recorded delivery, permitting them to use other communication methods. The FCA stated: Even with an implementation period, streamlining the process means millions of people would receive compensation in 2026.
The FCA has been consulting on plans since outlining a proposed compensation scheme last October. This scheme could result in payouts for approximately fourteen million unfair motor finance deals, with an average compensation of about £700 each. The regulator estimates the redress scheme could cost lenders around £11 billion, including the expenses of implementation and administrative work.
Financial Implications and Industry Response
Dan Coatsworth, head of markets at AJ Bell, commented: Millions of people hoping for a cash windfall from motor finance mis-selling compensation might find the money lands just in time to deal with a big increase in the cost of living. He added that while qualifying motorists might have previously earmarked any compensation for treats like holidays or shopping sprees, the sharp rise in energy prices could necessitate other plans for that money.
Coatsworth further noted: Lenders including Barclays, Lloyds and Close Brothers have already set aside large sums of money to cover any compensation payments, and they will want to put the episode behind them as soon as possible.
Eligibility for Compensation
Motor finance firms and lenders broke the law and FCA rules by failing to properly inform customers about commission paid by lenders to car dealers that sold them loans. This issue arose because some companies had discretionary commission arrangements with brokers, allowing them to adjust customers' interest rates on Personal Contract Purchase (PCP) and Hire Purchase agreements.
Consequently, many motorists did not have the opportunity to negotiate or find a better deal, potentially leading them to pay higher interest rates for their loans. Since brokers earned more commission on higher rates, this created an incentive to maximise the rates offered. An estimated forty percent of car finance deals were affected by this issue.
How to Proceed
The FCA advises individuals who believe they may have been mis-sold car loan deals with hidden commission to complain directly to their finance provider ahead of the scheme starting. The regulator emphasised: There is no need to use a claims management company (CMC) or law firm, and those who do may lose over 30% of any compensation. This guidance aims to ensure consumers retain the full amount of any redress they are entitled to under the new scheme.
