Car finance scandal customer compensation scheme looks increasingly likely, warns watchdog

The UK’s top financial watchdog has said that it’s “likely” that it will enforce an official redress scheme if next month’s Supreme Court ruling finds that lenders have misled consumers over secret commission payments in car finance deals.

Earlier this year, the Financial Conduct Authority (FCA) launched a probe into the car finance industry after complainants reported that their claims were being rejected by firms who were, at that time, being overwhelmed with thousands of grievances.

The FCA had previously stated that it would consider an official redress scheme if the Supreme Court were to rule in the favour of consumers. However, the watchdog has now warned finance firms that “if, taking into account the Supreme Court's decision, we conclude motor finance customers have lost out from widespread failings by firms, then it's likely we will consult on an industry-wide redress scheme.”

Following on from this, the FCA also said the chance of such a scheme is now looking “more likely than when we started our review” and that it wants to make sure “consumers are appropriately compensated in an orderly, consistent and efficient way”. 

This is all down to the ongoing car finance scandal, which began after a landmark Court of Appeal (CoA) ruling found that finance firms were illegally paying car dealers commission in what’s known as a ‘discretionary commission agreement’ (DCA). While paying commission and essentially artificially inflating the price of finance for consumers in the process isn’t illegal per se, doing so without the knowledge of the consumer is; indeed it was specifically outlawed in 2021.

However, the crucial point of the CoA’s decision is that it ruled that DCAs, as well as non-DCAs, were illegal in the first instance, meaning those who signed up to almost any car finance deal between 2007 and now could be eligible to file a claim.

As you’d expect, this has opened up the floodgates for what could be, according to experts, billions of pounds in payouts – perhaps on a similar level to the PPI scandal of the early 2010s. 

With banks concerned that a redress scheme could be catastrophic for the industry, the UK Chancellor, Rachel Reeves, recently led a Treasury application to intervene in the Supreme Court’s final ruling. However, this was later rejected, with the FCA and National Franchised Dealers Association instead granted permission to get involved.

Looking towards next month’s ruling, the FCA says it no longer plans to announce the outcome of its investigation in May, instead promising to “confirm within 6 weeks of the Supreme Court's decision if we are proposing a redress scheme and if so, how we will take it forward.”

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