Motor finance customers could receive a pay out after the FCA announced it will consult on an industry-wide compensation scheme.
The regulator has proposed a formal consumer redress scheme for individuals who were overcharged due to the use of Discretionary Commission Arrangements (DCAs), a practice the regulator banned in 2021.
Many motor finance firms were not complying with rules or the law by not providing customers with relevant information about commission paid by lenders to the car dealers who sold the loans.
The announcement follows last Friday’s landmark ruling by the Supreme Court, on cases in which the FCA had intervened. While some motor finance customers won’t get compensation because in many cases commission payments were legal, the Court ruled that in certain circumstances the failure to properly disclose commission arrangements could be unfair and therefore unlawful.
The FCA will propose rules on how lenders should consistently, efficiently and fairly decide whether someone is owed compensation and how much. It will monitor if firms are following the rules and act if they’re not.
The FCA currently estimates that most individuals will probably receive less than £950 in compensation.
The final total cost of any compensation scheme will depend on the final design. However, the FCA thinks it is likely to lie somewhere between £9 billion and £18 billion.
The consultation will launch by early October and, if the compensation scheme goes ahead, the first payments should be made in 2026.
The FCA noted that people who have already complained don’t need to do anything, but consumers who are concerned that they were not told about commission and think they may have paid too much for their motor finance lender should complain now.
Consumers do not need to use a claims management company or law firm and doing so could cost them around 30% of any compensation paid.
Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.
“Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.
“It will take time to establish a scheme but we hope to start getting people any money they are owed next year.”
Aidan Rushby, founder and CEO of car finance lender Carmoola, commented: “This consultation is an important milestone. The FCA has acknowledged the scale of harm caused by discretionary commission arrangements and now must ensure affected consumers receive fair compensation without further delay.
“The Supreme Court may have narrowed the legal path, but that does not remove the moral obligation to put things right. Some of the industry’s practices were clearly unfair, and it’s time to make amends.
“We fully support the FCA in its efforts to bring justice to customers who were misled, overcharged, or manipulated by opaque commission structures. Transparency and fairness must now become the standard.
“Our mission has always been to put the customer first. That means just honest, simple car finance. The industry needs to learn from the past, fix what went wrong, and rebuild trust."
