Millions of motorists are in line for compensation from their lenders after the UK financial watchdog confirmed redress plans for drivers impacted by the car finance mis-selling scandal.
The Financial Conduct Authority (FCA) said it is launching a £7.5 billion compensation scheme to give cash back to Britons impacted by unfair car loans.
However, the final plans confirmed on Monday suggest less money will be handed out in total and fewer people are likely to be eligible for payouts compared with its initial estimates.
Here, the PA news agency looks into the scheme and what consumers can expect.
– What is the mis-selling scandal?
Many cars are bought using car finance deals, with around two million sold by this method each year.
These typically involve customers agreeing to pay an initial deposit and then monthly instalments with interest payments.
However, many of these historic deals have been considered potentially unfair following investigations.
Most of the car finance deals under scrutiny involve so-called discretionary commission arrangements (DCAs), which were stopped by regulators in 2021. This refers to arrangements whereby brokers, including car dealers, were able to increase interest rates on car loans so they could get more commission.
– What is the regulator doing?
The FCA said many of these finance arrangements led to unfairness for customers who were not properly informed about the arrangement and therefore did not have the opportunity to negotiate or find themselves a better deal.
It has looked into data from around 32 million motor finance agreements made between April 6 2007 and November 1 2024, incorporating loans on a car, motorbike or van.
The regulator launched a consultation process after initial findings last year and said it received more than 1,000 responses.
– How will the scheme work?
The FCA advises that people submit a complaint to their lender using a template letter on its website.
The final plan has separated the redress process into two schemes, with one relating to loans taken out after April 1 2014, and the other for those prior to this date.
Lenders will then have three months from the date of the FCA’s schemes launching to contact those customers and let them know if their car finance agreement is eligible for compensation.
It means customers with loans dated from April 2014 must be told within three months of June 30 whether they are owed compensation and how much it will be.
Those with loans from before this must be told whether they are owed compensation and how much it will be within three months of August 31 this year.
Lenders will also be expected to reach out to those customers who have not complained and who may be eligible. People will need to reply to say if they want their case to be assessed.
Many customers have already lodged a complaint if they think they were not told key details about their motor finance deal.
The FCA advises that people submit a complaint to their lender using a template letter on its website (Alamy/PA)
– How many people will receive compensation?
The final plans indicated that 12.1 million motor finance deals will be eligible for compensation.
The total number of people receiving payouts is likely to be less than this as some people took out more than one car finance deal which could eligible during the time period.
The latest figures are, however, lower than the 14.2 million deals estimated to have been eligible for payouts in the FCA’s previous proposals from last year.
– How much money will people get?
Firms are expected to pay out compensation totalling around £7.5 billion, down from a previous estimate of £8.2 billion.
However, the reduced number of eligible redress claims means that average payouts are set to be higher than previously expected.
The FCA said the average compensation payment for each car finance deal will be around £829.
It had previously suggested the payout would be £695 per deal.
– How long could it take to receive a payout?
Customers who have made inquiries about their car loans should be told whether they are eligible and how much they could receive by the end of this year.
Firms also have until the end of 2026 to contact people with affected car loans dated since April 1 2014 who have not made a complaint.
They will have until the end of February 2027 to complete this for those with older loan agreements.
Consumers must respond within six months of these dates if they wish to join the relevant schemes.
The regulator said millions of consumers are set to receive payouts later this year.
It added that most of the rest of affected motorists will get their redress “by the end of 2027”.
– Should I get a lawyer to help?
The FCA has made clear that consumers do not need to use a claims management company (CMC) or a law firm to access its compensation scheme.
It warns that people could be subject to unnecessary fees if they do and could risk losing a portion of their compensation as a result.
