Millions of British drivers caught up in the widespread car finance scandal could each be left around £500 out of pocket under compensation plans being finalised by the financial regulator, a leading law firm has warned.
The Core of the Dispute
The controversy centres on compensation owed to motorists who took out car finance agreements between April 2007 and November 2024. During this period, lenders frequently paid secret, undisclosed commissions to brokers, typically car dealerships, which could have unfairly inflated the cost of loans for consumers.
Law firm Slater & Gordon, which represents hundreds of thousands of affected drivers, has launched a fierce attack on the Financial Conduct Authority (FCA). The firm accuses the watchdog of protecting the banks and finance companies involved by proposing a compensation cap that systematically undervalues the harm suffered.
Billions in Disputed Redress
Slater & Gordon alleges that the FCA's proposed redress formula will leave as many as 14.2 million car buyers short-changed by a staggering total of £8.1 billion. The regulator has estimated that lenders will pay out roughly £11 billion overall, including £8.2 billion in direct compensation and £2.8 billion for scheme administration.
Under the current FCA plans, the average payout would be approximately £700. However, the law firm argues that a fair settlement should be closer to £1,200 per person – leaving each motorist an average of £500 worse off than they should be.
The firm has taken specific issue with two elements of the FCA's plan:
- A "hybrid" compensation formula that averages total commission paid with the FCA's estimate of consumer loss.
- An interest rate applied to redress set at base rate plus 1%, rather than the 8% commonly used in personal finance compensation cases.
Research from WPI Economics commissioned by Slater & Gordon suggests the hybrid formula alone would cut payouts by £3.5 billion, with the lower interest rate reducing them by a further £4.6 billion.
Industry Stance and Next Steps
Major banks are already bracing for significant financial impacts. Lloyds Banking Group, a dominant player through its Black Horse brand, has set aside £1.95 billion. Other lenders like Barclays, Santander, and Close Brothers are also facing substantial bills.
Not all parties believe the compensation scheme is too stingy. The Finance and Leasing Association has argued it should be tightened further, potentially excluding millions of buyers who it claims suffered no actual loss.
The FCA concluded its consultation on 12 December and is expected to finalise the compensation terms by the end of February. The situation remains volatile, with lenders reportedly considering a judicial review if the scheme is deemed too generous, and Slater & Gordon hinting at legal action if it is not generous enough.
An FCA spokesperson stated: "We’re considering feedback to the consultation which will help us refine our proposals to ensure any scheme is fair and robust. Our scheme aims to be simple for people to use. That means on such a complex issue not everyone will get everything they would like."
The spokesperson added that consumers can choose to bypass the FCA scheme and go to court, but warned that process is uncertain, potentially slower, and legal fees could leave many with less money.
