Payouts under the car finance redress scheme are expected to start this year, the Financial Conduct Authority (FCA) has said, though lenders will be allowed more time to process claims. The regulator is currently moving through a consultation period to finalise how the scheme will work, but proposed changes to "streamline" the process should mean payments start before the end of 2026.
The redress scheme will focus on motorists who agreed car finance deals in which commissions were inadequately disclosed and which incentivised charging higher interest rates. The compensation bill could total £11bn for lenders, with payouts of around £700 per claim.
There have been more than 1,000 responses to the FCA's proposals, including from industry bodies and lenders, with the final details expected later this month.
An FCA spokesperson said: "Even with an implementation period, streamlining the process means millions of people would receive compensation in 2026."
How is the FCA proposing to 'streamline' the car finance redress scheme?
There had been fears that several different issues, including legal action from lenders, could crop up during the consolidation process and trigger significant delays for consumers.
One issue raised by lenders is that they 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.
The FCA's solution is to offer lenders more time to track down certain claims. It now plans to give lenders an "implementation period" of three months from the launch of the scheme to pay out compensation, rising to up to five months for "older agreements". At the end of that period, lenders would have an additional three months to inform the consumer whether or not they are owed compensation, and how much. The consumer can then accept the offered amount, or wait for a "final determination".
Lenders do not have to use all the time the rules allow and could offer compensation much sooner, for example, to consumers whose data is readily available because they have already complained.
Sue Robinson, chief executive of the National Franchised Dealers Association, welcomed the changes as "the proposed flexibility around implementation timescales - including extended periods of up to five months for older agreements - recognises the operational complexity involved and will help firms deliver fair and accurate outcomes for customers."
However, Alex Neill, co-founder of Consumer Voice warned: "Allowing lenders more time to process older complaints will only be justified if they play fair and use the extra time to do everything possible to locate the paperwork and contact customers."
Who can claim through the car finance redress 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 consumers, as they essentially incentivised dealers to set higher rates 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 out in the region of £11bn. This is based on a total compensation bill of £8.2bn to £9.7bn, plus the £2.8bn expected cost of running the scheme. It estimates payouts will average £700, based on the number of consumers expected to claim.
The £700 figure is lower than many consumers and campaigners had hoped for or expected, especially as the FCA had previously stated that total compensation could reach £18bn.
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 can you make a car finance redress scheme claim?
Under the FCA's proposals, 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 are compensated first once the scheme goes live.
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 their 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 been contacted by 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 participate in the FCA redress scheme, they may choose to take legal action directly against their lender. The FCA recommends that anyone considering doing so, should seek 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 car finance redress 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. Action has been taken against FCA-regulated CMCs for poor practice, with more than 800 misleading adverts removed or amended in the last two years and five firms punished by the regulator.
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?
Final details on the specifics of the redress scheme are expected to be announced by the end of the month. In the meantime, you can find the latest information on the FCA's dedicated webpage.
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