Millions to get payouts this year as FCA goes ahead with Motor Finance compensation scheme| Industry reaction

Late this afternoon, the FCA confirmed that millions of motor finance customers will receive compensation this year under a Financial Conduct Authority (FCA) scheme for those treated unfairly by firms that broke the law by failing to disclose important information.  

According to the FCA, consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.  

The FCA says it has made several changes to the free-to-use scheme in response to conflicting feedback  from consumers, their representatives, firms, manufacturers and industry bodies and their full statement is published below.  

FCA Statement

This ensures it is fair for consumers and proportionate for firms. The eligibility criteria have been tightened, average compensation increased for older agreements and a minimum 3% compensatory interest rate per annum added. Payouts will be capped in around 1 in 3 cases to ensure no one is put in a better position than had they been treated fairly.  

12.1 million agreements made between 2007 and 2024 are now eligible for compensation, fewer than under the FCA’s original proposals. 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 £7.5bn.  

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 £7.5 billion 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.” 

An industry-wide scheme is the most efficient way of compensating affected consumers while supporting the ongoing availability of competitively priced motor finance for millions who rely on it. Without such a scheme, the cost to lenders of dealing with complaints through the Ombudsman or courts is estimated to be over £6bn higher.   

How the scheme will work   

Motor finance loans taken out between 6 April 2007 to 1 November 2024 are covered.   

There will be a short implementation period so firms can prepare. This will be up to: 

• 30 June 2026 for loans taken out from 1 April 2014 
• 31 August 2026 for those agreed earlier  

Lenders will have 3 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.   

Lenders will only contact people who haven’t complained if they are likely to be owed money. They have 6 months from the end of the relevant implementation period to do so. This avoids unnecessary and potentially confusing communication with people who won’t get compensation. Anyone not contacted has until 31 August 2027 to make a claim.   

Claims for high value loans - amounts higher than 99.5% of other loans that year - are not covered by the scheme, which is designed for the mass market. These consumers can still complain to firms and the Financial Ombudsman Service.    

People will only be compensated if they were not told clearly that either:  

1. Their dealer or broker set the interest rate to earn more commission (using a discretionary commission arrangement – DCA). 
2. The commission was high – at least 39% of the total cost of credit and 10% of the loan.  
3. The dealer or broker was using one lender or gave one lender the right of first refusal, (a so-called tied arrangement), except where lenders can evidence that there were visible links with a manufacturer and franchised dealer. For example, where they shared a common or similar name. 

There will be some exceptions, with cases considered fair, if:   

• The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date. Commission amounts below those levels are unlikely to have influenced the broker’s behaviour or consumer’s decision.     
• The borrower wasn’t charged interest.   
• The DCA wasn’t used to earn discretionary commission. 
• The lender can prove, in certain limited circumstances, it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss. For example, if no better deal was available. 

Where the commission was very high (50% of the total cost of credit and 22.5% of the loan) and another relevant factor of unfairness existed, consumers will receive the commission paid.  

For most people compensation will be made up of 2 parts, the average of:  

• The commission paid; and 
• The estimated loss, based on a percentage discount of the interest (APR) they paid – 17% for cases from April 2014 and 21% for earlier agreements, to reflect greater loss then.  

Consumers should not be put back in a better position than they would have been had they been treated fairly or than those who suffered the most unfairness, so in around 1 in 3 cases, compensation will be capped. 

Interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year.   

The FCA has established a dedicated supervisory team, led by a Director, to monitor if firms are meeting the scheme’s rules and act if they’re not. If people disagree with their firm’s decision, the Financial Ombudsman will be able to assess whether the scheme rules have been followed.  

The FCA has also joined with the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority to launch a taskforce to tackle poor handling of motor finance claims by some claims management companies (CMCs) and law firms.  

The taskforce is the latest measure by regulators to improve standards. The FCA has already removed or amended 800 misleading adverts, over 28,000 consumers have been able to exit contracts free of charge, and 3 CMCs reduced their high fees, protecting over 500,000 consumers. 

Consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case. However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with less. The FCA’s scheme is also likely to be faster and simpler.  

Advice for motor finance customers  

• If you are concerned you were treated unfairly, make a complaint. People who complain before the relevant implementation period ends will be compensated sooner.   
• There is information on how to complain for free on the FCA website. There is no need to use a claims management company or law firm. If you do, you could lose over 30% of any money you get.   
• If you don’t complain and are owed money, your lender should contact you by end of 2026 for post 1 April 2014 agreements and end of February 2027 for agreements that started between 6 April 2007 and 31 March 2014.  

Finally, the FCA warns people to watch out for scams on this process saying “you can check you are dealing with your genuine lender using the contact details listed on the FCA website or through the FCA’s new motor finance scams helpline. You shouldn’t pay a fee to access compensation, or share sensitive details such as your PIN or online banking details.”

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Danni Hewson, AJ Bell head of financial analysis, has shared her comments on the scheme saying:

“For millions of motorists today’s decision from the FCA finally brings them one step closer to getting compensation for car finance they were mis-sold. The payouts will average at £829, with some people in line for more than one round of compensation.

“Those who have already filed a claim should get compensation more quickly than those yet to make contact with their lender, but the FCA has laid out a framework for all motorists owed compensation to be contacted in the next few months.

“Buying a car is often the biggest purchase people make outside of a home, and the process can be stressful and confusing. Once you’ve picked the vehicle you want the next step is working out if you can afford it, and many people never look past the monthly payments to consider how much interest they will be paying or whether there might be a better deal out there.

“The FCA is demanding more transparency from lenders going forward and discretionary commission arrangements have already been banned. But without the option of finance most people would struggle to find the cash to fund vehicle payments and there have been concerns that lenders could limit the products made available to motorists if compensation costs spiralled.

“The tightening of criteria by the FCA will keep compensation payouts to £7.5 billion, down from the £8.2 billion that had initially been reported during the consultation process. Lenders will only be required to contact motorists who are due compensation, which will also help keep down the cost of managing compensation schemes.

“Finding the paperwork from loans dating back to 2007 might be impossible for many people and some may be tempted to use claims management companies which will take a chunk of the total compensation payout. But putting the onus on lenders to contact those owed compensation should remove the need for motorists to use third parties and the FCA has also set out plans for a taskforce to monitor those companies already handling claims to protect consumers.

“There are still fears that scammers will now rush to exploit the situation and people should be careful when receiving emails or text messages which call for quick action in relation to making a claim.

“Under the scheme, eligible motorists should get compensation this year. However, there is still the potential that further legal action from either lenders or complainants could delay the process.”

Peter Rothwell, Head of Banking, KPMG UK says:

“Today’s announcement gives lenders and the market greater clarity on how the motor finance redress scheme will be put into action. While the final rules reflect some changes to eligibility and redress – with estimated payouts decreasing from £8.2bn to £7.5bn – the FCA has stood firm on the main criteria and this remains a substantial exercise. With an initial start date of June 30 2026, lenders must now unpick the detail and move quickly from planning to execution.

“The FCA has made the decision to implement two schemes, one covering April 2007 –  March 2014 and another April 2014 – November 2024. This could help to speed up the process for some consumers, but also risks causing confusion for others. 

“As the industry works through this detail, attention will turn to whether any elements of the scheme face further scrutiny or challenge.”