Car finance compensation payments delayed until next year

Car finance compensation payments delayed until next year

Millions of motorists who were mis-sold car finance deals will have to wait until at least 2027 to get compensation, regulators have said.

Average payouts of around £829 are expected under the rules released by the Financial Conduct Authority (FCA).

But legal challenges to the scheme, which will be heard in February 2027, have pushed back both compensation calculations and payments.

Most new cars, and many used ones, are purchased using finance agreements. Buyers pay an upfront deposit to secure the vehicle, followed by monthly instalments with interest.

Compensation may be available to many people who took out a car loan between April 2007 and November 2024.

The FCA’s decision covers about 12 million car loans, a little over 40% of the total during that period.

In 2021, the FCA banned arrangements in which car dealers received commission from lenders based on the interest rate charged to the customer. These were called discretionary commission arrangements (DCAs), and customers were often not told about them.

The FCA said this created an incentive for buyers to be charged a higher interest rate than necessary, meaning they paid more than they should have.

Other car buyers were also found to have signed unfair contracts because the commission paid to the dealer was so large, amounting to at least 35% of the total cost of credit and 10% of the loan.

Some customers were not given accurate details about the best finance deal because of exclusive agreements between car dealers and lenders.

Under the latest proposals, the FCA expects average compensation of £829 per mis-sold agreement.

The overall cost of compensation, including administration, could reach £9.1bn.

How much each consumer gets will depend on how much harm they suffered.

For some customers, especially those whose contact details have changed, it could take many months before any payment is made.

Complaints have already been submitted about four million finance agreements. Those customers do not need to do anything.

The regulator urged anyone who has not yet complained to contact their car loan provider directly, rather than using a third-party claims management company.

Its central compensation scheme lets people complain and potentially receive compensation for mis-sold deals without needing a lawyer or going to court.

Motorists have also been warned to watch out for scammers pretending to be car finance lenders and offering fake compensation.

The FCA has published this guidance on how to complain.

Under its plans: lenders will reply to claims, explaining whether compensation is owed and how much — but the timing of those letters is now uncertain because of the legal challenge; people who complain before the scheme is fully operational are likely to receive compensation sooner; people who complained by 30 June and are not owed compensation should be told by 18 November; those who complained by 31 August will be told if they are not owed compensation by 18 January 2027; those who have not complained will be contacted by their lender. People will be asked whether they want to opt in to the scheme so their case can be reviewed. Motor finance borrowers who do not receive a letter — for example because lenders no longer have their details and cannot trace them — can still make a claim.

Regulators have warned claims management companies and law firms involved in motor finance commission claims to ensure consumers do not have more than one representative for the same claim and are not charged excessive termination fees.

FCA chief Nikhil Rathi told the BBC’s Today programme that there are “many law firms out there who would like to get 30% of any compensation”, adding that the regulator’s scheme was “free to use” for consumers.

Millions of drivers were expected to receive compensation this year, and most of the rest should have been paid by the end of 2027.

But the FCA has confirmed that no compensation will be paid before 2027 because of legal challenges to the scheme.

Consumer Voice said the scheme left “too many people short-changed”.

The FCA has also faced challenges from three lenders: Volkswagen Financial Services, Mercedes Benz Financial Services, and Credit Agricole Auto Finance.

The UK’s Upper Tribunal has agreed to hear the legal challenges, with a hearing set for 16 to 26 February.

That means lenders will no longer have to calculate or pay compensation to people owed money under the scheme until the legal process is finished.

The FCA said it would need to decide what to do next if the courts overturned the programme. Without a scheme in place, it estimates that up to 19 million complaints would have to be dealt with individually, taking three years and costing lenders £6bn more.

It said it would “defend the scheme robustly as lawful and the best way to resolve such a widespread, long running and complex issue”.

In the end, the industry is expected to bear the full cost of any compensation scheme, including administrative expenses.

Lenders, including some of the UK’s biggest banks and specialist motor finance firms, have already put aside billions of pounds for possible payouts.

The Finance and Leasing Association, which represents the lending industry, said it had “concerns” about the programme but had decided not to launch a legal challenge.

Santander, Barclays and Lloyds also accepted the scheme, despite concerns that the level of redress is disproportionate to the harm suffered.

Even if drivers are entitled to compensation from these lenders, they will have to wait.

The FCA made some concessions to lenders in a scaled-back final compensation plan.

The Supreme Court examined three test cases that shaped the FCA’s decision and ultimately limited how wide the compensation programme could have been.

It looked at whether car dealers had a duty to act for their customers rather than in their own interests.

In his case, the Supreme Court said the terms of his finance deal were unfair because of the size of the commission payment and because he appeared to have been misled about the relationship between the finance company and the dealer.