FCA Car Finance Compensation Scheme Could Cost Banks £11bn After Mis-Selling Scandal
The Financial Conduct Authority has set out a proposed Car Finance Compensation Scheme that could see lenders paying around £8.2 billion in compensation, with running costs pushing the total to about £11 billion. The scheme covers motor finance agreements from April 2007 to November 2024, and the FCA expects average payouts to be roughly £700 per agreement.
The move follows legal clarity and a long FCA probe into discretionary commission arrangements, the practice at the centre of the mis-selling scandal.
Car Finance Compensation Scheme: What is it?
Scheme design and scope
The Car Finance Compensation Scheme is an industry-wide redress plan proposed by the FCA. It is aimed mainly at agreements where lenders paid commission to dealers in a way that allowed dealers to set interest rates.
The FCA’s consultation covers around 14.2 million agreements and will focus on fairness, speed, and simplicity in delivering redress. The regulator says the scheme is the most efficient way to get compensation to those affected.
Who qualifies, briefly
People with motor finance deals containing discretionary commission arrangements (DCAs), or similar unfair terms, are likely to be eligible. The FCA’s press materials explain that eligible agreements were made between 6 April 2007 and 1 November 2024.
The FCA will publish templates and guidance for consumers and for firms that must deliver redress.
Why did the FCA propose a scheme now? Legal clarity after court rulings, plus multi-year FCA work, means a single scheme can reach millions quickly and avoid lengthy court battles.
Car Finance Compensation Scheme: The Root of the Mis-Selling Scandal
How discretionary commission arrangements worked
DCAs gave dealers the power to adjust interest rates, with higher dealer commission tied to higher customer rates.
That created an incentive to set rates that increased dealers’ pay, and left some customers paying more than they should have. The FCA found that many lenders did not disclose these dealer commission arrangements properly.
Why DCAs were banned and what followed
The FCA outlawed DCAs in January 2021, after concerns that they led to consumer harm. The watchdog then investigated historical cases, and in light of legal developments, proposed the current compensation scheme as the best way to resolve a complex legacy issue.
The FCA also noted a prior Supreme Court change in the legal landscape, and said not everyone will get the same outcome.
Why were customers not aware? Many customers were not told about the commissions, so they could not negotiate or shop around, and they paid higher interest as a result.
Car Finance Compensation Scheme: Which Banks Are Most Exposed?
Lender exposure and industry reach
The FCA’s estimate of £8.2 billion in compensation reflects the scale of affected agreements across multiple lenders. The scheme will affect many motor finance firms and banks that underwrote or provided dealer finance over the period.
The FCA’s consultation asks for detailed feedback from firms to assess market impact and manage stability.
Market reactions and reserves
Some lenders have already set aside provisions for redress in prior quarters. The FCA stresses it wants a scheme that balances fairness for customers with the need to keep the motor finance market functioning. Trade bodies have warned about costs and market disruption, while consumer groups pressed for fast redress.
Could more financial institutions be affected? Yes, the scheme spans a wide period and many firms; the FCA’s consultations will clarify precise exposures and timelines.
Car Finance Compensation Scheme: How Will the FCA Oversee Compensation Claims?
Practical steps and timelines
The FCA plans a structured rollout. People who have already complained will be contacted first. Firms must contact customers they think may be eligible once the scheme starts. If a lender cannot contact someone, that person will have one year from the scheme’s start to make a claim.
The FCA intends to run an awareness campaign to guide consumers. Interest on payouts is expected to be calculated at the Bank of England base rate plus 1% in many cases; the FCA estimates average interest to be about 2.09% for this program.
Keep claims simple, avoid claims farms
The FCA emphasises that consumers do not need a claims management company or lawyer to use the scheme; the regulator will provide templates and guidance to reduce third-party costs that could eat into compensation. The FCA wants the scheme to be simple, quick, and cost-efficient for both claimants and firms.
How will I know if I qualify? If you have already complained, your lender will contact you; otherwise, you will be contacted when the scheme starts, or you can use the FCA’s templates to make a claim.
Car Finance Compensation Scheme: What This Means for UK Car Buyers and Lenders
Consumer impact and likely payouts
The FCA expects the average payout to be around £700 per agreement, though actual amounts will vary widely. Around 14.2 million agreements may be eligible, though this does not equal 14.2 million individuals because some people took multiple deals. Payouts could start early next year, subject to consultation outcomes.
Broader market and reputational effects
This is one of the largest redress programs since the PPI scandal. It raises questions about consumer trust and the future of commission-based sales models. Banks will need to manage capital, communications, and regulatory expectations while delivering millions of payments. The FCA says it will work to limit market disruption while ensuring consumers are compensated.
Authentic social post: the FCA has begun public outreach to raise awareness of the scheme, as reflected in its communications and campaign plans. See the FCA’s announcement and guidance on its website, and the consultation documents for full details.
Will this change how car loans are sold? The scheme and enforcement make clear that opaque commission structures are no longer acceptable; lenders must adopt fair, transparent pricing going forward.
How to File a Compensation Claim
Steps the FCA recommends
- Complain to your lender if you have not done so.
- If you have already complained, wait for your lender to contact you when the scheme starts.
- Use the FCA’s template complaint letter if you need to submit a claim.
- Avoid paying a claims management firm; it may take a large cut of any compensation.
The FCA consultation has more details, and the watchdog will advertise how to claim when the scheme launches.
Conclusion
The Car Finance Compensation Scheme marks a major moment for UK consumer protection. The FCA’s plan seeks to deliver swift redress to millions, with the regulator estimating a £8.2 billion compensation cost and roughly £11 billion including running costs.
The consultation will shape the exact mechanics and the final cost, but the message is clear: firms that failed to treat customers fairly must make good. For millions of drivers, the scheme offers a route to compensation, and for the industry it is a reminder to put transparency and fair practice at the centre of retail finance.
FAQ’S
The average payout under the Car Finance Compensation Scheme is expected to be around £700 per agreement, though it can vary depending on how much extra interest you were charged. Some customers may receive higher amounts if multiple loans were affected.
The car finance scandal involves lenders and dealers using discretionary commission arrangements that encouraged higher interest rates for borrowers. This led the FCA to create a Car Finance Compensation Scheme to refund customers who were unfairly charged.
You can check your loan paperwork or contact your lender to see if a discretionary commission was applied. If your loan included such a commission, you might qualify for the Car Finance Compensation Scheme once it launches.
Keep your car finance agreement, payment statements, and any emails or letters from your lender. These documents help prove you were charged interest linked to dealer commission, which is key to claiming under the Car Finance Compensation Scheme.
The Financial Conduct Authority (FCA) estimates total redress could reach £8.2 billion, with costs possibly rising to £11 billion across UK banks. Individual settlement amounts depend on loan size, term, and how much unfair interest was added.
Disclaimer
This content is for informational purposes only. Do not take it as financial advice. Always conduct your research.
