Business
Millions of drivers to get £700 compensation from car mis-selling scandal
Compensation payouts on around 14 million unfair motor finance deals could start next year, at an average of about £700 each, the Financial Conduct Authority (FCA) has said.
The regulator previously suggested motorists could receive less than £950 per deal, but it now suggests they could receive less compensation than previously estimated.
The redress scheme was previously estimated to cost lenders between £9bn and £18bn; it is now expected to cost lenders £8.2bn, based on about 85 per cent of eligible consumers taking part.
Motor finance firms broke the law or its rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, the regulator said. This meant that many motorists did not have the opportunity to negotiate or find a better deal and therefore may have paid a higher interest rate for their loan.
Nikhil Rathi, the FCA’s chief executive, said in a statement that it was time for customers to get fair compensation.
“Many motor finance lenders did not comply with the law or the rules,” Mr Rathi said. “Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
The FCA boss said that not everyone would get what they wanted following the ruling, as the regulator will work on the compensation scheme.
“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated,” he said. “On such a complex issue, not everyone will get everything they would like.
“But we want to work together on the best possible scheme and draw a line under this issue quickly.
“That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
The FCA found that car buyers “may have been charged too much” by their lenders, meaning that anyone who bought their car before January 2021 using a car finance scheme could be eligible for compensation.
Some companies used “discretionary commission arrangements” with brokers, which gave them the power to adjust customers’ interest rates on Personal Contract Purchase and Hire Purchase agreements.
The watchdog, which looked into data from across some 32 million agreements made between 2007 and 2024, believes setting up a free compensation scheme will be easier and quicker for customers to access, and more cost-effective for firms by removing much of the legal and administrative work.
As up to 90 per cent of new cars purchased in the UK are bought using motor finance, it’s estimated that millions could potentially be due payouts following the ruling.
Because these brokers earned more commission on higher rates, this created an incentive to maximise the rate given. An estimated 40 per cent of car finance deals were thought to be affected by the issue.
The FCA outlawed this practice from 28 January 2021, but acknowledged that a “high number” of people have now come forward to claim they had been overcharged before the ban.