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The Financial Conduct Authority (FCA), the UK’s financial regulator, has proposed a compensation scheme to address widespread mis-selling in the car finance sector.

The FCA estimates that potential payouts could stem from approximately 14 million motor finance agreements established between April 2007 and November 2024, representing an estimated 44% of all such agreements during that period.

However, the scope of eligibility for compensation has been narrowed following a recent Supreme Court ruling. The court sided with finance companies in two out of three pivotal test cases that examined commission payments from banks and other credit providers to car dealerships.

The majority of new vehicles, and a substantial number of used cars, are purchased using finance agreements.

Roughly two million vehicles are financed annually, with customers typically making an initial deposit followed by monthly payments inclusive of interest.

In 2021, the FCA prohibited discretionary commission arrangements (DCAs), where dealers received commissions from lenders based on the interest rate charged to the customer. These arrangements were often not disclosed to consumers.

The FCA determined that DCAs incentivized dealers to charge consumers higher interest rates than necessary, resulting in overpayment.

Since January, the regulator has been evaluating whether compensation should be provided to individuals involved in these agreements dating back to 2007.

Additionally, some car buyers may have been subject to unfair contract terms due to excessively high dealer commissions – accounting for at least 35% of the total credit cost and 10% of the loan – or received biased information favoring specific lenders due to exclusive rights agreements.

Under the proposed scheme, the FCA anticipates average compensation payouts of £700 per mis-sold agreement.

This figure is lower than the regulator’s initial estimate of less than £950 per deal.

Consequently, the total estimated cost of redress is now projected to be at the lower end of the FCA’s initial range, approximately £8.2 billion.

The FCA has clarified that the actual amount of compensation awarded to individual claimants will depend on the extent of harm suffered.

The regulator reports that it has already received complaints pertaining to four million agreements. Individuals who have previously filed complaints are not required to take further action. The FCA advises those who have not yet complained to directly contact their car loan provider instead of utilizing a claims management company.

Key aspects of the FCA’s plan include:

The FCA aims to launch the new compensation scheme in early 2025, with prompt payouts to follow. However, some claimants – particularly those with outdated contact information – may experience delays in receiving compensation.

The industry is expected to bear the full cost of the compensation scheme, encompassing both payouts and administrative expenses.

Lenders, including major UK banks and specialized motor finance firms, have already allocated over £2 billion to cover potential payouts.

Lloyds Bank has earmarked £1.15 billion, while Santander has set aside £295 million.

Financing companies such as Close Brothers (£165 million), Northridge Finance (£143 million), and MotoNovo (through FirstRand, £140 million) have also reserved significant sums. A portion of these funds will be used to cover legal and administrative costs.

Stakeholders retain the opportunity to provide feedback on the FCA’s proposed redress scheme.

The Supreme Court’s review involved three test cases, examining whether undisclosed commission payments from finance companies to dealers constituted bribery. The court also considered whether car dealers had a duty to prioritize their customers’ interests over their own.

A ruling in favor of the plaintiffs could have facilitated millions of compensation claims. However, the court ultimately sided with the finance companies in two of the test cases.

This decision has limited the number of individuals eligible for compensation.

The Supreme Court overturned prior rulings in the two test cases which had deemed hidden commissions on car loans unlawful.

The one test case that was upheld involved Marcus Johnson, 34, from Cwmbran, Torfaen, who purchased his first car, a Suzuki Swift, in 2017.

Mr. Johnson was not informed that the car dealership was receiving a 25% commission, which was added to his repayment amount.

“I signed a few documents and then drove away in the car,” he told the BBC.

He explained that he felt compelled to use financing to purchase the car and described the revelation of the undisclosed commission as “heartbreaking.”

While “pleased” with the outcome of his own case, Mr. Johnson expressed disappointment for the “hundreds of others” who would be excluded from compensation. “It’s a win, but it’s a really big bag of salt to go with it,” he stated.

In Mr. Johnson’s case, the Supreme Court determined that the terms of his finance agreement were unfair due to the substantial commission payment and the perceived lack of transparency regarding the relationship between the finance firm and the dealership.

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Millions of motorists may be entitled to compensation following potential mis-selling of car finance agreements.

Ongoing investigations are examining practices by dealerships and lenders – some of which have faced regulatory action – that could lead to a comprehensive industry-wide compensation scheme for consumers.

A Supreme Court ruling on August 1st has the potential to broaden the scope of eligible claimants, sparking significant discussion among consumers and policymakers.

The majority of new vehicles, and a considerable portion of used cars, are purchased using finance agreements.

Approximately two million vehicles are financed annually, with customers typically paying an initial deposit followed by monthly installments including interest.

In 2021, the Financial Conduct Authority (FCA), the UK’s financial regulator, prohibited discretionary commission arrangements (DCAs), wherein dealers received commission from lenders based on the interest rate charged to the customer.

The FCA determined that these arrangements incentivized dealers to charge consumers higher interest rates than necessary, resulting in overpayment.

Since January, the FCA has been evaluating whether compensation should be provided to individuals who entered into these agreements prior to 2021.

Currently, claims submitted to the Financial Ombudsman Service, which has 80,000 open cases related to this issue, and legal proceedings are effectively paused.

Millions of motorists could potentially receive compensation, contingent on the specifics of their interest rate and the transparency surrounding it. Consumers who entered into finance agreements with DCAs before January 28, 2021, may be eligible.

Compensation is likely to be administered through a centralized scheme managed by the Financial Conduct Authority (FCA), aiming to establish an organized compensation process.

This approach would streamline the process for consumers compared to individual legal action and would require firms to assess whether customers incurred losses.

The scope of compensation could be further expanded based on the outcome of the Supreme Court decision.

Guidance from the FCA indicated that any compensation scheme must be equitable for consumers while also preserving the stability of the automotive market.

Officials will decide within six weeks of the court decision whether a scheme will be implemented, although it is unlikely to be operational until 2026.

Details remain under development, including whether claimants will be required to actively opt-in to the scheme.

While uncertainties remain, lenders, including major UK banks, have already allocated billions of pounds in anticipation of potential payouts.

Compensation would likely encompass the difference between the interest rate paid and the rate that should have been applied.

Interest at a rate of 8% on the overpayment would be added to that loss, which could significantly increase the payout.

Exact compensation amounts will vary based on individual circumstances.

A decision by judges at the Court of Appeal at the end of last year has widened the ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds.

While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the Court of Appeal decision widened the scope to any car finance commissions.

The three judges unanimously agreed that it would be illegal for the lender to pay any commission to the dealer without the informed consent of the buyer.

In other words, customers should be clearly told how much commission would be paid, and agree to it, without those details being buried in the terms and conditions of the loan.

The hearing included the test case of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car – a Suzuki Swift – in 2017.

He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.

“I signed a few documents and then drove away in the car,” he told the BBC.

He said he had no option but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.

“Someone in my situation at that time, not being able to buy that kind of age car with cash, you would use finance,” he said.

The FCA said that the decision could lead to dealers and motor finance providers receiving a deluge of new complaints, and it is urging people to make a claim if they feel they were the victims of mis-selling.

Under the FCA’s plans, providers will have until December to consider and respond to complaints, aligning the deadline for firms to deal with discretionary and non-discretionary arrangement complaints.

Some could come from people previously told they had no claim for compensation because they did not have a discretionary commission arrangement.

But the Supreme Court has heard an appeal against the decision on the wider commission issue.

The total cost of compensation could reach £25bn or more, according to analysts.

The hearing was in April and a judgement by the court judges is expected imminently.

In February, the Supreme Court rejected an unusual intervention from the government, which was worried huge amounts of redress payments could upset the car market and make it less competitive.

It could also affect banks’ ability to invest elsewhere as they would need the money for compensation.

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