Following a lengthy consultation period, the Financial Conduct Authority (FCA) has released details of its compensation scheme for millions of people mis-sold car loans.
Around 12 million drivers are now in line for a payout, after a systemic issue which led to them being mis-sold car finance deals, usually due to hidden commission arrangements. The average payout will be £830, the regulator has confirmed, and those affected will be contacted before the end of the year.
There will be two schemes: one for agreements made between 6 April 2007 and 31 March 2014 (Scheme 1), and one for those made between 1 April 2014 and 1 November 2024 (Scheme 2).
An implementation period has been set for firms to prepare to meet the deadlines set, with most having up to 30 June 2026 for those on Scheme 2, and 31 August for those on Scheme 1.
Firms have been told by the FCA that they must identify and contact people who have been affected and ask if they want to opt in to receive redress. Lenders will have three months from the end of the implementation period to do this.
This means that most car buyers affected should have at least been contacted by December 2026.
Those affected do not necessarily need to put in a complaint, but the FCA has confirmed that those who have already done so will likely receive compensation sooner. People who believe they may have been affected but have not been contacted have until 31 August 2027 to complain to their firm.
In an update earlier this month, the City watchdog said it had received 1,000 responses to its proposals for a compensation scheme, which has received some backlash from the lending sector since the plans were first revealed.
The FCA estimates that lenders will pay redress of £7.5bn. The total bill to firms, including non-redress costs, is expected to be £9.1bn, and will affect around 44 per cent of deals made between 2007 and 2024.
Motor finance firms and lenders broke the law and FCA rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, the regulator has previously said. This is because some companies’ “discretionary commission arrangements” with brokers gave them the power to adjust customers’ interest rates on personal contract purchase (PCP) and hire purchase agreements. As a result, 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.
Because these brokers earned more commission on higher rates, this also 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.