FCA goes ahead with compensation scheme
Millions of motor finance customers will receive compensation this year under an FCA scheme for those treated unfairly by firms who broke the law by failing to disclose important information.
Consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.
The FCA has made several changes to the free to use scheme in response to conflicting feedback from consumers, their representatives, firms, manufacturers and industry bodies.
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:
- Their dealer or broker set the interest rate to earn more commission (using a discretionary commission arrangement – DCA).
- The commission was high – at least 39% of the total cost of credit and 10% of the loan.
- 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 2026 for post 1 April 2014 agreements and end February 2027 for agreements started between 6 April 2007 and 31 March 2014.
- Watch out for scams. 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.
Aidan Rushby, CEO and founder of car finance organisation Carmoola, said: “Millions of drivers could receive compensation after not being fully informed about how broker incentives affected the cost of their finance. The FCA has now confirmed a framework for putting that right.
“What matters now is whether drivers actually receive compensation quickly, clearly and without hassle.
“Redress must reflect genuine harm. But it must also be applied proportionately and consistently. Restoring confidence depends on delivering compensation clearly, consistently and as quickly as possible.
“Our research shows 73% of drivers say access to fair and affordable finance is crucial to owning a car, and 61% worry it could become harder to access. That balance is critical.
“We believe car finance should be simple to understand, transparent in how it works, and fair in how it treats people. Trust now has to be earned. That is a healthy shift for the market.”
