The details will disappoint some motorists and campaigners who had expected far higher payouts. The FCA had previously said the expected figure would be less than £950 and now predicts an average of £700 per claim. This would mean lenders paying out around £8.2bn in compensation, the most significant mass payout for a mis-sold financial product since the PPI scandal, but less than the £18bn previously estimated.
Nikhil Rathi, chief executive of the FCA, said: "Many motor finance lenders did not comply with the law or the rules. 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.
"We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. 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."
Who can claim through the FCA scheme?
The redress scheme is for people who signed up to a car finance deal between 6th April 2007 and 1st November 2024.
The main targets are deals that featured a discretionary commission arrangement, or DCA. These agreements involved the dealer receiving an undisclosed commission based on the rate of interest charged to the borrower. DCAs were banned by the FCA in 2021 for being unfair to drivers by essentially incentivising dealers to set a higher rate of interest.
The scheme will also include some car buyers who signed deals paying an excessive amount of commission - defined as at least 35% of the total cost of the credit and 10% of the loan - or buyers who were given inaccurate information on the best deals available because of an exclusivity agreement between a lender and a car dealer.
The FCA estimates there were 14.2m unfair agreements signed over the qualifying period, which is 44% of all made since 2007.
How much will successful claimants get?
The FCA will set out how lenders are to assess claims and calculate compensation as part of the scheme, but it expects lenders to have to pay a compensation bill of £8.2bn. This could rise to £9.7bn and does not include the £2.8bn planned costs of running the scheme, which will also come from lenders. It estimates payouts to be an average of £700, based on the number of consumers expected to claim.
The £700 figure is less than a number of consumers and campaigners had hoped for or expected, especially as the FCA had previously stated that the total compensation could reach £18bn. Kevin Durkin of HD Law, which won a recent car finance case in the Supreme Court, described the plans as "watered down" and said victims "have been treated unfairly for a second time".
Some consumers will receive more than £700 and some less, depending on the circumstances of their claim. The FCA expects 14.2m agreements will be considered unfair, but this does not translate to 14.2m people, as some consumers will have signed multiple car finance agreements between April 2007 and November 2024.
The payouts should be boosted by inflation, likely to be the Bank of England base rate plus 1%.
How do you make a claim?
Under the FCA's proposed scheme, victims of the car finance scandal will fall into three groups: people who have already complained to their lender, people who can be contacted by their lender and people who cannot be contacted by their lender.
Over four million car buyers have submitted a complaint to their lender already and these are likely to be the people who hear back first and are compensated first, once the scheme goes live in 2026.
Affected consumers who have not yet made a complaint by the time the scheme starts, but can be reached by their lender should be contacted within six months of the scheme's start date to be asked if they want to have their case reviewed. They will then have six months to opt in.
Unfortunately, many lenders will not have retained the details of its customers. 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. Consumers who have not received a letter from their lender within six months of the start of the compensation scheme should assume they fall into this category and make a complaint directly to their lender. The FCA has included a template letter and instructions on its website. If you are unsure who your agreement was with, the FCA recommends looking through old bank statements, contacting the dealer who sold you the car and checking your credit file.
Consumers who receive a final response from their lender that they are not happy with will be able to escalate their case to the Financial Ombudsman Service.
If a consumer does not want to take part in the FCA redress scheme, they could choose to take legal action directly against their lender. The FCA recommends that anyone thinking of doing so seeks out independent legal advice.
Do you need to use a claims management company (CMC)?
The FCA does not recommend using a claims management company or law firm to manage your claim through the scheme. Making a claim is free, but using a CMC will mean you need to pay fees and VAT out of the compensation you receive.
You can end your agreement if you have already signed up with a CMC, but you may need to pay a fee to do so.
What will happen next?
The FCA hopes to start the compensation scheme in early 2026, but this could be subject to delays. While some consumers are unhappy that the potential payouts are too low, industry groups argue that the problem is being overblown.
The Finance & Leasing Association said: "We remain concerned that the costs are too high, but this [the scheme proposal] is a 360-page document which will require much scrutiny over the coming weeks as we assess the best way to get redress to those consumers who lost out, while keeping the motor finance market stable and competitive."
If parts of the lending industry choose to take legal action, this could slow down the process and current proposals may have to be reconsidered.
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