The City watchdog has dropped a bombshell on the automotive finance industry, ordering firms to establish a sweeping compensation scheme that could see millions of British drivers receive payouts for mis-sold car loans.
The Financial Conduct Authority (FCA) has directed numerous car finance firms to create a single, coordinated redress scheme for customers who were charged higher interest rates on their PCP and hire purchase agreements between 2007 and 2021. This comes after the regulator found evidence of widespread misconduct in how brokers were incentivised to increase customer interest rates.
What Sparked the Investigation?
The FCA's investigation was triggered by a flood of complaints to the Financial Ombudsman Service from consumers who believed they had been unfairly charged excessive interest rates on their car finance deals. The regulator discovered that many lenders allowed brokers to operate discretionary commission arrangements, which effectively incentivised them to charge customers higher interest rates than they otherwise might have qualified for.
This practice, now banned by the FCA, created a clear conflict of interest where brokers stood to profit directly by securing worse deals for their customers.
Who Could Be Affected?
The compensation scheme could potentially benefit:
- Individuals who purchased cars using PCP or hire purchase agreements between 2007 and 2021
- Customers who were not informed about how their broker's commission was structured
- Those who may have been charged higher interest rates due to discretionary commission arrangements
The exact number of affected consumers remains unclear, but given the popularity of car finance products during this period, the scheme could encompass millions of agreements and potentially billions of pounds in compensation.
What Happens Next?
The FCA has given firms a strict deadline to propose their redress scheme by September 20, 2025. The regulator will then review and approve the plan, which is expected to include:
- Identification of potentially affected customers
- Calculation of appropriate compensation amounts
- A clear process for making payments to eligible consumers
Consumers do not need to take immediate action as the scheme will automatically identify those who are eligible for compensation. The FCA has warned against claims management companies trying to take advantage of the situation, emphasising that customers can pursue claims themselves without paying hefty fees.
This development represents one of the largest financial redress programmes in recent years and serves as a stark warning to the financial services industry about the consequences of putting profits before customer fairness.
