Millions of drivers finally have details of city watchdog the Financial Conduct Authority’s final plans to compensate them for missold car finance
Compensation is expected to be paid on more than 12 million car finance agreements missold between 2007 and 2024.
City watchdog the Financial Conduct Authority said the number was fewer than originally proposed. But the average payout has increased to around £830 per agreement. The FCA estimates that 75% of eligible consumers will make a claim. If so, total redress paid would be £7.5billion.
Nikhil Rathi, chief executive of the FCA, said: “We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5billion back into people’s pockets.
“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure. Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”
The FCA had previously said money could start to be paid on an expected 14 million unfair motor finance agreements this year. It estimated last October – when the details were first proposed – that people would receive around £700 on average per agreement.
Consumer champion Martin Lewis, responding to the announcement, wrote on X: “I suspect there was some movement as (and I’d said this) – the prior payout reduction risked consumers choosing the court route not the FCA route and thus clogging up the courts. This is a slight redress of that misbalance.”
The founder of Moneysavingexpert said the reason fewer agreements qualified was because those involving minimal commission or zero APRs will not receive redress, as well as where a lender can prove there were visible links with a manufacturer and dealer.
The FCA has split all estimated 12.1 million missold agreements into two groups: those taken out from April 1, 2014, and for those agreed earlier. On while the FCA has done so, Lewis said: “I suspect this is because the first group is most likely to face a judicial review, so by splitting it. If the first group is challenged, it allows them to continue with scheme for 2nd group while first is on hold.”
Details of an industry-wide compensation scheme follow evidence that some motor dealers did not tell buyers that they were earning commission from lenders on some car finance deals they sold.
The FCA stepped in after a Supreme Court ruling provided clarity on a separate issue, that could have entitled even more people to compensation.
The expected payout is less than the £9billion to £18billion it had originally estimated but would still be one of the financial sector’s biggest compensation schemes. Experts think firms will have to shoulder a further £2.8 billion of costs, taking total industry costs to around £11 billion.
It came as the FCA earlier announced a new taskforce to tackle poor handling of motor finance claims by some claims management companies and law firms.
Why are finance firms on the hook for payouts at all?
It goes back to the information car buyers were given – or more importantly not given -when they bought a vehicle on finance. The broker who arranged the loan or finance agreement – often the car dealer – often earned a commission from the lender for doing so. But the controversy centres on whether that payment was revealed to buyers at the time, whether it was excessive, and if it affected the cost of the loan in terms of the interest rate they were charged.
The Financial Conduct Authority found motor finance companies broke the law and regulations in force at the time by failing to disclose this important information. “This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan,” it said.
What has the FCA announced?
An industry wide compensation scheme.
Am I eligible?
The scheme will cover motor finance agreements taken out between April 6 2007 and November 1 2024, where commission was paid by the lender to the broker. It applies to both new cars and second hand. There will be a short implementation period so firms can prepare. This will be up to June 30 this year for loans taken out from April 1, 2014, and until August 31 for those agreed earlier
Lenders will have three months from the end of the implementation period to inform complainants whether they’re owed compensation and how much. This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner.
The FCA says lenders will only contact people who haven’t complained if they are likely to be owed money. They have six months from the end of the relevant implementation period to do so.
Anyone not contacted has until August 31 2027 to make a claim.
How much could I get?
The FCA is estimating average payments of around £830 per agreement. That average includes some lower amounts but in the case of a much smaller number of people – about 13,500 – it could be much higher because, for instance, the commission paid was seen as particularly excessive.
The compensation also includes interest that will be paid on top of the original loan. It had been the Bank of England’s base rate in the year the loan was taken out, plus 1%. The FCA has now changed and it will be more generous.
The FCA has estimated the total compensation at £7.5billion. It is less than the £9billion to £18billion it had originally estimated but would still be one of the financial sector’s biggest compensation schemes. After the costs to firms, it would take total industry costs to more than £9billion.
Rachael Jones, director of automotive finance at vehicle marketplace Autotrader, said: “We support this pragmatic and proportionate approach from the FCA that strikes the right balance between ensuring robust protection and transparency for consumers, while underpinning the stability of an automotive sector that contributes billions to the UK economy every year. It’s vital that this scheme doesn’t inadvertently impact a market that has adapted and is now working well for consumers.”
She added: “It’s important consumers understand not only what compensation is available to them but also how they can safely and securely access this, as the FCA has explained this morning. We echo their advice to consumers to be cautious when engaging with any compensation claims.”
Zoe Morton, financial services director at consulting firm RSM UK, said: “The overall cost to the industry is far lower – a feat that has been achieved by excluding over four million people who would have been eligible for compensation under the previous proposals. These people will now miss out.
“The multi-stage redress timetable for older cases, including those pre-2014, means some consumers face a slightly longer wait for the outcome, despite being among the earliest affected.”
