Car finance compensation scheme: How will redress work and who is eligible?
Millions of people who mis-sold car loans will soon learn more details about how their compensation payments will be made when the Financial Conduct Authority (FCA) finalizes its long-awaited scheme.
In an update earlier in the month, the Council watchdog said it had received 1,000 responses to the compensation scheme proposals, which had received some pushback from the credit industry, since the plans were first announced.
If the scheme gets the green light, the regulator expects to give lenders up to five months for older car loan deals “in response to the scale and complexity of the scheme and feedback”, three months before they must start contacting motor finance customers.
Consumers will then wait up to three months before being told whether they owe compensation and how much.
However, the regulator aims to facilitate the process by allowing the required compensation to be accepted immediately, without waiting for the final decision.
The regulator will also no longer require lenders to ask complainants if they want to opt out before the scheme starts, and will no longer require them to write to customers via recorded delivery, allowing them to contact them by other means.
The FCA said: “Even if there is an implementation period, streamlining the process means millions of people will receive compensation in 2026.”
The FCA has been consulting on the plans since last October when it outlined a proposed compensation scheme that could see payments for around 14 million unfair motor finance deals, averaging £700 each.
It is estimated that the compensation scheme could cost lenders around £11bn when the cost of implementing the scheme and carrying out the work is taken into account.
Dan Coatsworth, head of markets at AJ Bell, said: “Millions of people hoping to get a cash windfall from motor finance mis-selling compensation may find the money arrives just in time to cope with a major rise in the cost of living.
“While qualified drivers may have previously set aside any compensation for a treat such as a holiday or shopping spree, the sharp increase in energy prices over the last few days may require other plans to be made for this money.
He added: “Lenders, including Barclays, Lloyds and Close Brothers, have already committed large sums of money to cover compensation payments and will want to get this period behind us as soon as possible.”
Who will be entitled to receive compensation?
The regulator has previously said car finance firms and lenders were breaching the law and FCA rules by failing to properly inform customers about the commission lenders pay to car dealers who sell them the loan.
This is because some companies’ ‘discretionary commission arrangements’ with brokers give them the power to set interest rates for customers on Personal Contract Purchase (PCP) and Hire Purchase agreements.
As a result, many drivers did not have the opportunity to negotiate or find a better deal, and so they may have paid a higher interest rate on their loans.
This also created an incentive to maximize the rate offered, as these brokers earned more commissions from higher rates. An estimated 40 percent of auto finance deals were thought to be affected by this issue.
The FCA is advising those who believe they may have been mis-sold hidden commission car loan deals to complain to their finance provider before the scheme starts.
He emphasized: “There is no need to use a claims management company (CMC) or law firm and those who do may lose more than 30% of compensation.”
