The UK’s financial regulator has outlined its final plans for a £9 billion scheme to compensate 12 million car finance customers, with money starting to flow later this year.
The FCA (Financial Conduct Authority) has been looking into the mis-selling of certain types of car finance products since the start of 2024, with the investigation expanding and then narrowing again over the last two years. After a lot of consultation, court cases and media speculation, the regulator has finalised a compensation package.
What’s this all about?
In January 2024, the FCA announced that it was investigating the misuse of specific types of arrangements within millions of car finance agreements, called Discretionary Commission Arrangements (DCAs). These allowed finance managers at car dealerships to manipulate the interest rates on car loans that had already been approved in principle by car finance lenders.
In other words, the dealer would submit an initial finance application to the lender on a customer’s behalf, and the lender would approve the loan at a particular interest rate. But rather than tell the customer that they’d been approved, the dealer could then decide to move that interest rate up or down – which usually meant up, increasing the customer’s monthly payments.
DCAs were banned in 2021, but there was a growing number of cases coming through the Financial Ombudsman Service and through the courts, with customers claiming that the finance companies and dealers had mis-sold finance. When a couple of these cases resulted in wins and compensation for customers, the FCA decided to investigate the whole practice industry-wide.
The investigation then broadened into more general aspects of commission payments from lenders to dealers, and how these commissions were disclosed (or not). Meanwhile, one group of cases was taken all the way to the Supreme Court as concerns of widespread mis-selling expanded to cover almost all types of car finance. The court struck down two of the three charges, but one was upheld.
Who is getting compensation?
The FCA has decided that numerous finance companies “broke the law by failing to disclose important information to customers”, and is implementing an industry-wide compensation scheme to redress these failures.
After months of consultation across the industry, the FCA has determined that about 12 million agreements (not necessarily 12 million customers, as some people will have had multiple agreements) are eligible for some compensation.
Most of the eligible customers will have had contracts containing DCAs, although they won’t have known that as it was not disclosed. Some cases will involve very high levels of commission that were deemed unfair, while other cases fell foul of various disclosure requirements.
The affected agreements cover a 17-year period from 2007 to 2024. There is concern that older cases will be harder to prove if neither the lender nor the customer still have any paperwork to confirm details of the finance agreements.
There are multiple criteria for determining which customers are eligible for compensation and how much they are likely to receive, which we won’t go into here as the FCA explains it well enough on its own site. You’re most likely to be eligible if your agreement included a DCA, or if your lender paid what the FCA considers an excessively high level of commission to the dealer that sold you the agreement.
The onus is on the lenders to determine eligibility and determine compensation amounts, with the FCA overseeing their work.
How will the compensation scheme work?
The FCA has effectively created two parallel schemes; one for agreements taken out before April 2014, and one for agreements taken out from April 2014 to November 2024. This is because there are likely to be challenges to the FCA’s authority to regulate the pre-2014 cases, since it was not the government regulator for car finance before April 2014.
In order to prevent the threat of legal challenges from derailing the post-2014 claims (which make up the bulk of the 12 million agreements in question), the pre-2014 claims will be handled separately.
Customers who have already registered their details with their lenders will not need to do anything further, and these complaints will be processed first. Customers who have not yet lodged a complaint will then be processed afterwards. If customers do not lodge a complaint but are likely to be owed money, lenders will have to make contact to invite them to lodge a complaint.
The deadlines for lenders to implement their schemes and contact customers are slightly different depending on whether the agreements were taken out before or after April 2014.
Customers will have until August 2027 to lodge a complaint if they have not been contacted. If customers are contacted by their lender, they will have six months to respond and lodge a claim.
The estimated average compensation amount is about £830, although this will depend on your circumstances. For most customers, the FCA’s calculations will be based on the commission paid and the estimated loss based on the interest paid on the loan. The calculation will include provision for interest on the compensation amount at a minimum of 3% per year.
In about a third of cases, compensation will be capped to ensure that customers don’t end up in a better position than they would have been if they had not been mis-sold.
How do I get car finance compensation?
If you believe that you may be eligible for compensation for a car finance agreement (most likely an HP or PCP agreement) taken out between April 2007 and November 2024, you should lodge a complaint.
You will need to complain to the lender who financed the car, not the car dealer or the car manufacturer. If you still have the contract paperwork, you should be able to see which company it was. If you don’t know the lender, that makes it harder. You can try checking your online credit report to look for details of old loans, or search your old bank statements for direct debit references if you still have them.
However, even if you do nothing, any lender will still be obliged to contact you in coming months (by the end of December 2026 for post-April 2014 agreements, by the end of February 2027 for pre-April 2014 agreements) if you are likely to be eligible for compensation.
The FCA website also has information on how to complain for free. You don’t need to pay a claims management company or law firm to act on your behalf, although you are entitled to do so if you wish. However, using a legal firm is likely to take longer, will cost you money and does not guarantee that you will ultimately receive any more compensation than you would get using the FCA’s free scheme.
Watch out for scams
Now that the FCA has announced a compensation scheme, there will inevitably be scammers out to prey on unsuspecting consumers with the promise of easy money.
Lenders will be required to contact customers if they believe that the customer may be eligible for compensation and that customer has not already lodged a claim. To help streamline the scheme and reduce costs to lenders, the FCA has dropped a previously planned requirement for lenders to use recorded delivery letters, and will now allow ‘a range of communication channels’ instead. But that opens the door for scammers posing as lenders to catch out unwary customers.
Anyone getting a phone call or an email about potential car finance compensation should immediately be suspicious. Do not give out any personal information – end the call, do not reply to the email or click on any links in the email, and do not call any phone number that claims to be from your lender.
You can then contact your lender yourself and in your own time, and the best way to guarantee that you’re talking to the genuine lender is to check their contact details on the FCA website (https://www.fca.org.uk/consumers/fca-firm-checker), or by calling the FCA’s scams helpline (0800 111 6768), before calling, emailing or filling in any online forms.
