Thousands Could Receive Compensation from £18 Billion Auto Loan Payout Plan

A substantial compensation fund, potentially worth billions, is set to be distributed among many drivers following the city regulator’s decision to initiate a compensation scheme for those impacted by the car finance controversy.

The Financial Conduct Authority (FCA) is preparing to discuss a compensation scheme that might burden banks with costs ranging from £9 billion to £18 billion, with payouts expected to commence next year.

However, those who were mis-sold car finance are likely to receive less than £950 per claim.

The regulatory body outlined these plans following a supreme court decision that significantly altered a previous ruling on car finance, potentially reducing compensation claims from a staggering £44 billion to a scale similar to the Payment Protection Insurance (PPI) scandal.

Bobby Dean, a member of the Treasury committee and a Liberal Democrat MP, described the mis-sold car finance issue as “the most significant consumer finance scandal since PPI”.

“Billions will be owed. The total compensation could well exceed £10 billion. It is crucial for the industry to prioritize honesty and modify their practices accordingly,” he commented.

The FCA noted that the cost of the redress scheme, which includes administrative expenses, is unlikely to be significantly less than £9 billion and could be considerably more. They consider the midpoint of their estimated range to be the most reasonable projection.

The consultation on the scheme will commence by October, aiming to encompass drivers affected by discretionary commission models. Typically, the scheme is expected to offer less than £950 in compensation for each claim.

These commissions, prohibited since 2021, escalated car financing costs by enabling dealers to earn higher commissions for loans with elevated interest rates, affecting around 14.6 million contracts from 2007 to 2020.

Additionally, the FCA will seek opinions on broader issues in motor financing, potentially affecting a larger group of borrowers with agreements dating from 2007 to 2024.

On a recent Friday, the supreme court mostly sided with finance companies by reversing a prior ruling that deemed the commissions illegal. Judges maintained that one specific case was “unfair” due to the excessive commission paid to the dealer and the manner of its disclosure.

Prior to the decision, concerns were raised by the chancellor, Rachel Reeves, about the potential impact of the supreme court’s verdict on lenders, to the extent that she considered intervening to counteract it.

Nikhil Rathi, CEO of the FCA, stated, “It’s evident that certain firms violated the law and our regulations. It’s only right that their customers receive compensation. We also aim to ensure the market remains functional and consumers receive fair deals.

“We’re planning a compensation scheme that is both fair and straightforward to participate in, eliminating the need for claims management companies or legal firms, which would take a substantial portion of any compensation received.

“It will take time to establish this scheme, but we hope to begin distributing owed funds by next year,” he added.

The supreme court case was initiated by two specialist lenders, Close Brothers and South Africa’s FirstRand, challenging three consumers who won an appeal in October.

Judges reviewed the appeal court’s ruling, which had deemed nearly all undisclosed commission arrangements as unlawful, potentially implicating major lenders like Santander UK, Close Brothers, Barclays, and Lloyds in compensations reaching up to £44 billion.

This amount could have nearly matched the scale of the PPI scandal, which cost the banks approximately £50 billion.

The FCA emphasized that the final compensation scheme must consider various factors, including the extent of consumer harm and the potential market response of lenders withdrawing affordable loans.

The car finance sector has expressed concerns that a hefty compensation bill could financially cripple some lenders, while others might need to offer fewer or more costly loans to recover their losses.

The FCA also tempered expectations for large individual payouts, explaining that borrowers are unlikely to recover much more than the original commission paid to the dealer. Although interest would be applied, it would likely amount to about 3% annually.

Any expanded scheme would also take into account various factors, such as the borrower’s financial literacy at the time of signing the contract and the amount of information provided.

Martin Lewis, a prominent consumer advocate and founder of MoneySavingExpert.com, noted that car lenders might still resist the FCA’s compensation plans.

“The industry might fiercely contest this, and it could be a protracted battle. What we now need is consistency, transparency, and expedience—both for the industry and individuals involved—to navigate through this. Hopefully, the industry will refrain from further legal challenges that could delay the process,” he remarked.

Alex Neill, co-founder of Consumer Voice, commented, “This represents a crucial chance to rebuild trust and rectify the misconduct of dealers and lenders. However, as always, the effectiveness of the scheme will hinge on the details—the true test is whether it delivers fair compensation on a large scale.

“Significant challenges await the regulator, including engaging all affected drivers and convincing consumers to trust a scheme administered by those who wronged them,” she added.

The FCA pledged to ensure that lenders assess claims “consistently, efficiently, and fairly,” and stated it would monitor compliance with the rules and take action if necessary.

The City regulator also advised anyone with concerns about their car finance agreement to contact their lender directly. It noted that motorists who have already lodged complaints with their lender need not take further action, as these complaints will not be reviewed until at least December, following a pause by the regulator.