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FCA unveils compensation plan for mis-sold car loans
Millions of UK drivers who were overcharged on car finance agreements could receive compensation this year under a new regulatory scheme. The Financial Conduct Authority (FCA) expects average payouts of £829 per affected contract, though legal challenges may delay payments.
Scope of the issue
The FCA's decision covers approximately 12 million car loans-just over 40% of all agreements issued between April 2007 and November 2024. Most new and many used vehicles in the UK are purchased through finance deals, where buyers pay an upfront deposit followed by monthly instalments with interest.
How customers were overcharged
The regulator banned discretionary commission arrangements (DCAs) in 2021, where dealers earned higher commissions based on the interest rates charged to customers. Many borrowers were unaware these arrangements existed, creating incentives for dealers to inflate rates. In other cases, commissions exceeded 35% of the total credit cost or 10% of the loan value, rendering contracts unfair.
Exclusive lender-dealer agreements also prevented some customers from accessing the best available finance terms, the FCA found.
Compensation details and timeline
The total compensation bill, including administrative costs, could reach £9.1 billion. Payout amounts will vary based on the harm suffered by individual borrowers. While the FCA aims to distribute most payments by the end of 2027, delays are likely due to ongoing legal challenges.
Around four million complaints have already been filed. Affected customers need not take further action, but the FCA advises those who haven't complained to contact their loan provider directly-avoiding third-party claims firms, which may charge fees.
"There are many law firms out there who would like to get 30% of any compensation. Our scheme is free to use for consumers," FCA chief Nikhil Rathi told the BBC's Today programme.
Nikhil Rathi, FCA CEO
Legal hurdles and industry response
The scheme faces opposition from consumer group Consumer Voice, which argues the plan short-changes victims and has applied to the Upper Tribunal for a review. Three lenders-Volkswagen Financial Services, Mercedes-Benz Financial Services, and Crédit Agricole Auto Finance-have also mounted legal challenges. The FCA has vowed to "defend the scheme robustly" as the fairest solution to a widespread issue.
The Finance and Leasing Association, representing lenders, expressed concerns but opted not to challenge the plan. Major banks like Santander, Barclays, and Lloyds accepted the scheme despite reservations about the redress levels.
The Supreme Court's 2023 ruling in a test case-brought by Marcus Johnson, who was misled over his 2017 Suzuki Swift finance deal-limited the scope of compensation. The court determined dealers had a duty to act in customers' interests, not their own.
Scams and next steps
The FCA has warned motorists to beware of scammers posing as lenders offering fake compensation. Official guidance on how to complain is available on the regulator's website.
Lenders, including high-street banks and specialist finance firms, have already set aside billions to cover payouts. The industry will bear all costs, including administrative expenses.
