Car finance mis-selling: Am I eligible for compensation, and what do I do?

Millions are expected to receive an average payout of £700 from the redress scheme revealed by the Financial Conduct Authority

Approximately 14 million people will be able to claim compensation payouts for unfair motor finance deals as soon as early next year, after the UK financial watchdog released plans on the redress scheme.

The Financial Conduct Authority’s (FCA) chief executive, Nikhil Rathi, declared it was time that “customers get fair compensation” while announcing the scheme, which he said “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” he added. “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.”

Nearly half of all car loan agreements made between April 2007 and November 2024 could be eligible for payouts, which will amount to an average £700, according to the FCA, and could create a £8.2bn compensation bill for lenders.

With millions expected to receive an average £700 in compensation, here is how consumers can find out whether they are eligible.

Drivers could receive a payout after the Financial Conduct Authority announced it will consult on an industry-wide compensation scheme (Ben Birchall/PA) (PA Archive)

What's the scandal about?

Motor finance firms broke the law or its rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, according to the FCA.

All car finance agreements with hidden commission were rendered unlawful in October last year by the Court of Appeal, months after the FCA launched an investigation into ‘Discretionary Commission Arrangements‘ (DCAs).

DCAs allowed brokers and dealers to adjust customers' interest rates on Personal Contract Purchase and Hire Purchase agreements - but because brokers earned more commission on higher rates, this created an incentive to maximise the rate given.

An estimated 40 per cent of car finance deals were thought to have been affected by the issue. It meant that many motorists did not have the opportunity to negotiate or find a better deal, and therefore may have paid a higher interest rate for their loan.

ADVERTISEMENT

ADVERTISEMENT

The FCA outlawed the practice from 28 January 2021.

What did the Supreme Court rule in August?

Close Brothers and Motonovo, the key car finance firms involved, went to the Supreme Court to challenge a Court of Appeal ruling that found that the commission payments paid by buyers to car dealers before 2021, without the motorist’s fully informed consent, were unlawful.

The UK’s highest court partially overturned the landmark decision in ruling that lenders were not liable for hidden commission payments on car finance agreements, which effectively reduced the worst-case scenario for compensation claim payouts.

However, it fell short of being a full victory for the lenders, as the Supreme Court upheld the finding in one case involving a driver that the relationship between the finance company and the customer was unfair.

It meant that the compensation to be paid out be lenders dropped significantly, from more than £45bn to the £8.2bn estimated today.

Chief executive Nikhil Rathi has said it’s time customers receive compensation (Financial Conduct Authority/PA) (PA Media)

What will victims receive, and how can you claim?

Compensation payouts on around 14 million unfair motor finance deals could start next year, at an average of about £700 each, the FCA has said.

If you have already put in a complaint, the car finance firm will have three months to write to you to inform you that you are included in the scheme, according to Money Saving Expert founder Martin Lewis.

If you have not already complained, then the car finance firms have to identify all those mis-sold and need to get in touch with you within six months of the scheme starting, and you can decide to opt in.

Mr Lewis suggested putting in a complaint as soon as possible, so you are already included in the scheme when it begins.

He advised against using a claims firm because they will charge commission, and instead urged people to use a template letter on his website.

For people who are worried they have been mis-sold a long time ago and are struggling for evidence, Mr Lewis said: “Have you got any proof that you had a car finance deal at that time? I'm saying an old credit reference file that includes it, an old bank statement, or a form where [you can prove that] you were paying them.

"If you do, that could be enough. What they'll then probably look at is whether that firm was systemically doing one of these categories [of mis-selling] to people in your situation at the time and, if so, it's possible you will get a payout.”

Who is eligible for a payout?

Anyone who bought a car on Hire Purchase or Personal Contract Purchase between April 2007 and November 2024 could be eligible for the redress scheme.

The watchdog has been looking into data from across some 32 million agreements made in that 17-year period and found that about 44 per cent of those will be considered unfair and will qualify for compensation under the FCA’s proposals.

An estimated 14 million of the car finance agreements in that time were believed to be mis-sold, according to the FCA, and are due a payment averaging £700.

Some four million car finance deals are estimated to have already been subject to a complaint – leaving around ten million which still could be raised.

Who will pay for the mis-selling scandal?

The FCA has said the scheme will focus on about 30 lenders who make up around 89 per cent of the motor finance market.

The watchdog has repeatedly warned consumers that they do not need to use a claims management company (CMC) or a law firm to access its compensation scheme, and could be subject to unnecessary fees if they do.

Consumers who think they may be eligible for compensation should contact their lender or broker if they haven’t already done so, said the regulator.

Lenders will have three months from the date of the scheme launching, set to be early next year, to contact those customers who have already complained – and six months to reach out to those who have not.

Mr Rathi said: “We’re expecting all lenders to make reasonable efforts to contact their customers that may be eligible and may be affected, so we certainly hope they’ll be able to reach as broad a group as possible within the time frames that we set out.

“If somebody is not contacted, they will have one year from the date of the start of the scheme to make a complaint to their lender.”