Low-income drivers who relied on loans for cheaper cars are more likely to miss out on payouts under the UK financial watchdog's compensation plans, according to new analysis by consumer law firm Slater and Gordon.
Around 1.1 million low-value car finance agreements will not be eligible for redress through the Financial Conduct Authority's (FCA) scheme. This is because deals involving smaller amounts of commission—£120 or less for agreements before April 1, 2014, and £150 or less after that date—are considered fair and are excluded from compensation under the final rules.
The FCA stated that commission amounts below these levels are unlikely to have influenced the consumer's decision or the broker's behaviour. However, Slater and Gordon noted that in most cases where smaller amounts were borrowed—often a few thousand pounds or less—the loan was used to purchase cheaper cars or vans. This suggests the policy disproportionately impacts financially stretched consumers rather than those using loans as a top-up for more expensive vehicles.
The firm used its own client data and case experience to identify this pattern.
Background on the FCA Scheme
The FCA established the industry-wide scheme to compensate individuals who were mis-sold car loans between April 2007 and November 2024 due to hidden commission that motorists were not properly informed about at the time of agreement.
Slater and Gordon argues that the minimum commission threshold automatically rules out agreements that may have been unfair while overlooking the fact that relatively small sums can make a material difference to poorer households.
Elizabeth Comley, the law firm's chief operating officer, said: "The people being cut out of this scheme are those at the lower end of the market—drivers who borrowed smaller amounts to buy cheaper cars and who can least afford to lose out. You don't see high-income consumers taking out £2,000 car finance agreements. These are people stretching to afford a vehicle, and they are now being told they don't qualify for compensation."
Legal Challenges and Uncertainty
Consumer Voice, a group representing consumers, is pursuing a legal challenge to the planned compensation package, arguing it will short-change drivers who suffered harm when taking out loans. Meanwhile, the regulator is also facing a lawsuit from three lenders—the financial services arms of Volkswagen and Mercedes-Benz, and the car finance arm of French bank Credit Agricole—who are unhappy with the redress plans, which are set to cost the industry around £9.1 billion.
The legal battle means the scheme is currently in limbo, with millions of payouts hanging in the balance. The FCA has warned of delays, changes, or the potential for the scheme to collapse. Despite the uncertainty, the watchdog has stated it will defend its scheme, which it says is "fair to consumers and proportionate for firms."
The FCA continues to advise consumers to complain directly to their lender if they think they might be owed compensation and has repeatedly said they do not need to use a law firm or claims management company, which can charge unnecessary fees.
The FCA has been contacted for comment on Slater and Gordon's analysis.
