In a move that brings a rare moment of financial comeuppance to the car-buying experience, the Financial Conduct Authority (FCA) has announced that millions of drivers who were mis-sold car finance agreements should receive compensation this year. Average payments of about £829 are expected under the rules published by the regulator, though a legal challenge by a consumer group threatens to delay the payouts - because apparently nothing says 'consumer protection' like a good old-fashioned courtroom standoff.
The compensation applies to roughly 12 million car loans taken out between April 2007 and November 2024 - just over 40% of the total during that period. The FCA banned discretionary commission arrangements (DCAs) in 2021, which allowed car dealers to receive commission from lenders based on the interest rate charged to customers, often without the customer's knowledge. This, the FCA said, created a cozy incentive for dealers to nudge buyers into higher interest rates, leaving them paying more than necessary. Some customers also signed unfair contracts where the commission paid to the dealer was at least 35% of the total cost of credit or 10% of the loan, while others were kept in the dark about better deals due to exclusive arrangements between dealers and lenders.
Under the FCA's latest proposals, the total compensation cost, including administrative expenses, could hit £9.1bn. Individual payouts will depend on the degree of harm suffered, and for some customers - especially those whose contact details have changed - it could be many months before they see a penny. The regulator has urged anyone who hasn't yet complained to contact their car loan provider directly, rather than using a third-party claims management company, which might try to take a cut. FCA boss Nikhil Rathi noted on the BBC's Today programme that 'many law firms out there would like to get 30% of any compensation,' stressing that the regulator's scheme is 'free to use' for consumers.
But the path to compensation isn't entirely smooth. Consumer Voice, a group that somehow thinks leaving people 'short-changed' isn't the ideal outcome, is applying to the Upper Tribunal to review the scheme's design. Meanwhile, lenders including Santander, Barclays, and Lloyds have accepted the plan despite raising concerns that the level of redress is disproportionate to the harm suffered - a sentiment that might be more convincing if they hadn't already set aside billions for potential payouts. The Supreme Court's consideration of three test cases, including that of Marcus Johnson who bought his first car - a Suzuki Swift - in 2017, limited the scope of the compensation programme. In Johnson's case, the court found the terms of his finance deal unfair due to the size of the commission payment and the fact he was likely misled about the relationship between the finance firm and the dealer. So, at least one person got a win out of this, even if it took a trip to the highest court in the land.