As many as 14 million people who bought a car since 2007 could soon be able to claim compensation through a redress scheme, as the car finance scandal took another step towards a resolution this week. Speaking to MPs on the Treasury committee this week, chief executive of the Financial Conduct Authority (FCA) Nikhil Rathi said the regulator would propose an industry-wide payment scheme by early October that would reach back as far as 2007 until an unspecified cut-off date, reported to be 2021.
The compensation stems from commissions that were paid to car sellers by lenders without being fully disclosed to buyers. These payments were made as part of millions of vehicle sales and have been judged to have incentivised higher rates of interest on car finance deals.
Now, the FCA must ensure that the affected consumers are compensated through a redress scheme, leading to Rathi's appearance in front of MPs this week.
How could the redress scheme work?
The FCA will need to set out rules for how firms are to assess claims and calculate the compensation consumers may be owed. Rathi told MPs that the development of the scheme was on track and more details should be published in early October.
Exactly how the scheme will work is still unclear, especially in terms of how it will account for record keeping. One key comment from Rathi related to how the scheme would deal with car finance firms that may not have customer details stretching back far enough.
He said "Where a firm says to us that they don’t have the data, we’re not just going to take that at face value. We will look at that very forensically."
Some lenders have argued that they simply do not have the consumer data to verify older claims. These may have been lost, or may have been deleted as part of policies to purge customer data after six years, which was the legal minimum period to retain such contracts until 2024.
Appearing alongside Rathi, FCA executive director in charge of authorisations Sheree Howard told MPs that lenders will need to find a way to retrieve data, for example by working with other companies.
"There is an ability, we think, across quite a high proportion [of firms] to get reasonable data, and … firms can work with third parties to try supplement that data like credit reference agencies."
When will compensation payments start?
Payouts are expected to begin next year, but there are still opportunities for delays. The consultation process is yet to begin and there remains a chance that some car finance firms may launch a legal challenge to delay or halt the scheme entirely.
Rathi warned MPs that "there may be parties that seek to delay this."
Should this happen, the whole process could be pushed back even further and current proposals may have to be reconsidered.
How much could you receive in compensation?
The FCA has estimated that the full redress scheme could end up costing car lenders between £9bn and £18bn. These firms range from smaller organisations, to high street lenders such as Lloyds, all the way up to high-end and specialist lenders. Payouts are expected to be in the hundreds of pounds rather than thousands, though the FCA's estimates have been disputed by some claims firms.
The exact amount a consumer eventually receives in compensation will depend on the circumstances of their claim, but the FCA estimates most individuals will receive less than £950. As this includes any interest which may be owed, claims relating to older purchases could pay out more.
The FCA has said it is unlikely to consider remedies that will exceed the full repayment of the initial commission plus interest of around 3% per year.
Which mis-selling cases will be included in the redress scheme?
The FCA is consulting on including the around 14m discretionary commission agreements (DCAs) from 2007 to 2021 as part of the redress scheme. Rathi said a "very significant proportion" of these are likely to be eligible for redress.
However, following the Supreme Court judgement, it will also consult on which non-DCA deals to include as part of the scheme. Rathi said a "smaller number" of car finance agreements with very high non-disclosed commissions could also be part of the redress scheme.
What should you do next if you believe you might be due compensation?
If you have already made a complaint, you don't need to do anything. Under the FCA's temporary rules, firms have until the 4th December 2025 to give customers a final response to relevant complaints.
If you have not complained already and you believe you were not told about a commission or paid too much for your finance deal, you can complain now. Should a redress scheme happen, compensation may be automatic meaning you won't need to have made a complaint to be compensated.
Nonetheless, it may be prudent to make a complaint if you believe you were mis-sold car finance. You can read how in our article 'Car finance mis-selling review – how to make a claim'.
Should you use a claims company?
Claims companies can take a large chunk of your compensation, so they are best avoided.
They should also be superfluous, if the FCA is successful in creating a redress scheme that is easy to participate in for most consumers, without the need to consult legal advice, with an automatic model that puts the requirement on the lenders to contact customers and offer compensation.
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