Car finance mis-selling scandal: redress scheme announced, but are you due compensation?
Affected by the car finance mis-selling scandal? Want to know how to claim? Here's what you need to know...
After months of waiting, the UK’s financial regulator has finally published its plans for a compensation scheme for the ongoing car finance scandal. Last year, the Supreme Court ruled generally in favour of consumers, paving the way for what’s expected to be more than £7.5 billion in compensation payouts, coming at a total cost to the industry of over £9 billion.
However, it’s not quite as straightforward as it seems. Challenges from lenders to both the courts and the Financial Conduct Authority mean the scheme we see now looks vastly different from what had originally been expected when the scandal began picking up pace. This might leave you with questions such as:
- Am I eligible for compensation?
- How much might I get?
- Should I use a car finance claims company?
- When might the payments arrive?
Our handy guide to the scandal below explains it all, as well as looking at how the situation started in the first place.
Who’s in line for compensation?
As part of its final redress scheme proposal, the Financial Conduct Authority (FCA) has outlined three types of people who are eligible for compensation:
- Those who signed up to a discretionary commissions arrangement (DCA).
- Those who signed up to a finance deal with excessively high commission (in excess of 39 per cent of the total cost of credit and 10 per cent of the loan) but were not informed.
- Those who signed up to an agreement with a broker who had already given exclusive first rights to a specific lender to provide the credit, without that being made clearly visible.
Any agreement that matches those listed above must have been signed between 6 April 2007 and 1 November 2024 to be eligible. In total, this is generally thought to represent roughly 44 per cent of Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements throughout this period.
Furthermore, if commission paid to the broker as part of a DCA totalled less than £120 (prior to 1 April 2014) or £150 (post 1 April 2014), then the agreement is deemed to be fair and thus won’t be eligible for compensation. This FCA says that this is because “those levels are unlikely to have influenced the consumer’s decision or broker’s behaviour”. Zero per cent interest finance agreements are also exempt from redress.
Regardless, DCAs were outlawed in 2021, so it’s unlikely that anyone signed up to one after that. However, there have since been cases of car buyers paying excessive commission and brokers being given exclusive rights by lenders, hence the broader eligibility up to 2024.
How much will I receive in car finance compensation?
The FCA estimates that average payout from the car finance scandal will total £829 per agreement. Those who signed up to more than one “unfair” agreement will receive payments for each and thus will be entitled to more.
To be a little more specific, consumers will be compensated the equivalent of 17 per cent of what they originally paid in interest for any eligible finance deal signed after 1 April 2014, or 21 per cent for any agreements prior. Therefore, if a borrower had paid £3,000 in interest on a car loan, then they would receive £510 or £630 respectively.
Furthermore, those who paid levels of commission equal to or above half the cost of credit and 22.5 per cent of the total cost of the loan will receive both the interest and commission they paid back. That would equate to a lot more cash than the average payout, although this is only expected to be the case for roughly 90,000 claimants.
However you look at it, the average payout is still less than what was originally expected. When the issue first came to light, the general consensus was that motorists would receive around £950 per agreement.
Will I have to contact my lender?
In most cases, those affected by the mis-selling of car finance will not have to contact their lender; following a consultation with the industry and affected parties, the FCA has provided lenders with an “implementation period”. This effectively means that they have until 30 June 2026 to contact consumers, rising to 31 August for older agreements signed prior to 1 April 2014.
We do, however, recommend that you file a complaint – tools to draft one can be found on websites such as MoneySavingExpert. This is because there is always the risk (particularly for older agreements, or those signed prior to getting married or moving house) that the finance firm no longer has your details and thus won’t be able to get in touch with you.
For customers that have already complained, firms will have three months from the end date of the implementation period to let them know if they’re due compensation and if so, how much. Once you have received an offer of compensation, you’ll be able to agree to this immediately, rather than awaiting a final decision.
For those who have yet to complain, lenders will instead have six months to contact them, after which customers will have another six months to accept whether they wish to join the redress scheme. If you’re not contacted in this period but still believe you might be due compensation, you have until 31 August 2027 to register a complaint.
Recent changes to the plans mean lenders won’t have to write to each potential claimant via signed delivery in order to reduce cost pressures on the industry. It’s also worth mentioning that consumers can choose not to take part in the redress scheme and go to court. This could potentially lead to them receiving even more compensation, but success is far from guaranteed and the process could be time-consuming and costly.
Should I use a car finance claims management company?
Car finance claims-management companies (CMCs) have been plastering the TV and internet with advertisements for their services, however the FCA advises consumers to avoid using them given the nature of the scheme; lenders are being told to contact claimants themselves, meaning utilising one of these claims firms in effect means superfluously giving up a potentially large proportion of your compensation.
The FCA also says that if you absolutely insist on signing up with one of these firms, make sure not to subscribe to more than one; doing so could mean you’d have to pay each one their share of your compensation, potentially leaving you with nothing. With this in mind, the FCA has instructed claims firms to allow consumers to terminate their agreements “without charging unfair fees”.
Executive director of authorisations at the FCA, Sheree Howard, said: “We’ve been clear about our expectations of CMCs. Before starting any case, firms should confirm a customer hasn’t already instructed another representative. Where someone signed up without fully understanding what they were agreeing to, we wouldn’t expect a termination fee to be charged. If any fee is applied, it must be reasonable, and reflect the work done.”
Those who have already signed up to multiple firms but don’t believe the agreement was fully explained, or those feeling that they have been unfairly charged are advised by the FCA to file a complaint directly with the CMC itself. If this is not resolved satisfactorily, the official advice is to forward their complaint to the Claims Management or Legal Ombudsman.
When will I receive compensation?
The FCA has not confirmed any exact dates as to when payouts will begin, but it has confirmed that “Millions of consumers will be compensated this year, most of the rest by the end of 2027.”
Don’t bank on it, though, because it’s always possible this timescale could be pushed backwards, or the redress plans redrawn due to legal challenges from the car finance industry. The Finance and Leasing Association, which has continuously criticised FCA compensation proposals, said in a statement that “it will take time for us to assess the market impact of the measures announced”.
“Any redress scheme for a market of this size must accurately identify and compensate only those customers who genuinely suffered loss,” said the FLA chief executive, Shanika Amarasekara. “If it is drawn too broadly so that it also compensates customers who suffered no loss, the only real winners will be Claimant Law Firms and Claims Management Companies”.
Car finance scandal: the background
The origins of the car finance scandal can be traced back to the beginning of 2024 when the FCA announced that it was launching an investigation into what’s known as Discretionary Commission Arrangements (DCAs).
Outlawed in 2021, DCAs essentially involved lenders artificially inflating interest rates in order to provide the car dealer with additional commission, thus pushing up the cost of finance for the customer. This, according to experts, was the case in roughly 40 per cent of finance deals between 2017 and 2021, costing consumers as much as £500 million per year more than with flat commission rates.
Everything came to a head after a Court of Appeal case between customers and some of the UK’s largest lending firms. The judge ruled that any part of a finance deal involving commission that’s not overtly outlined and agreed to by the consumer is unlawful.
This decision sent shockwaves through the car industry because it meant almost all car finance deals from 2007 could be affected, leaving the customer eligible for compensation. Experts originally estimated that as much as £40billion could be up for grabs in compensation.
However, in early August, the UK’s highest court, the Supreme Court, overturned the Court of Appeal’s judgement, claiming that dealers do not have a fiduciary duty to act in their customer’s interest, rather than their own.
Lord Reed, the President of the Supreme Court, delivered the judgement, saying: “At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller.”
However, as part of the same case that covered the undisclosed commission, the Supreme Court upheld a ruling surrounding what was deemed an “excessive” amount of commission. In this instance, commission paid to a dealer accounted for as much as 55 per cent of a car finance loan – something that has now been ordered to be paid back to the customer.
Following this, the FCA said it would consult on an official redress (compensation) scheme. This consultation has since ended and this brings us up to now, with the FCA having submitted the final redress scheme proposal.
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