City regulator unveils compensation scheme for motorists who bought cars via discretionary commission deals from 2007 to 2024
Victims of the UK’s car finance scandal are likely to receive compensation payouts averaging £700 resulting from 14m unfair loans, the City regulator said on Tuesday.
The payouts would be less than previously expected, but the Financial Conduct Authority (FCA) said lenders could be landed with an £8.2bn compensation bill, which could go as high as £9.7bn.
It looks likely to be the biggest mass payout relating to a financial product since the payment protection insurance (PPI) mis-selling debacle, which led to 34 million consumers receiving an average of about £1,000 each.
The City regulator’s long-awaited proposals for a compensation scheme cover millions of motor finance agreements taken out between April 2007 and November 2024. Payouts could start early next year, it said.
It relates to the alleged large-scale mis-selling of car loans involved in the payment of “secret” commissions to car dealers, and millions of car buyers unknowingly paying more for their finance than they should have.
Launching a consultation, the FCA said that based on the number of consumers it estimated could take part in the scheme, lenders could end up paying out £8.2bn in compensation, though the expected £2.8bn of running costs that firms would also have to meet would take the total bill to £11bn.
However, the regulator said that it was a complex issue and “not everyone will get everything they would like”. But it added that it was keen to create the best possible scheme “and draw a line under this issue quickly”.
The FCA said in August that it estimated “most individuals will probably receive less than £950 in compensation per agreement”. At that time, it said it was unlikely the cost of the scheme would be much lower than £9bn, and could be up to £18bn.
Now it says that based on its proposed scheme, it expects eligible consumers to receive an average of about £700 an agreement, though it adds that there will be “a wide range” of payouts, with many consumers receiving more than that, “and a large number receiving less”.
Nikhil Rathi, the chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules … it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
The vast majority of new cars and an increasing number of used vehicles are bought with motor finance – typically either a personal contract purchase plan or a hire purchase agreement. More than 2 million people use motor finance each year, with £39bn borrowed in 2024.
The compensation scheme has been unveiled despite a supreme court ruling in August that largely overturned a previous ruling that could have led to compensation payouts of up to £44bn.
That is because the FCA had been running its own investigation into “discretionary commission arrangements” (DCAs) – a particularly controversial type of car finance that was banned in 2021. With these deals, motor finance lenders – typically banks – gave dealers the power to set interest rates on car loans, with dealers getting more commission the higher the interest rate. This practice allegedly incentivised dealers to overcharge customers.
The scheme that the regulator is consulting on will largely focus on people whose deal included a DCA, which was by far the most common commission arrangement before it was outlawed.
Sign up to Business Today
Get set for the working day – we'll point you to all the business news and analysis you need every morning
after newsletter promotion
The regulators said it estimated that 14.2m agreements – 44% of all those made since 2007 – would be considered unfair.
However, that probably does not translate into 14 million people, as there will be some who bought several cars during this lengthy period who may be entitled to multiple payouts.
More than 4 million consumers have already complained to their lender. Once the scheme goes live, lenders will contact those who have complained. If they do not hear back from someone after one month, the lender will assume they should review their case. Those who have already complained before the scheme gets up and running are likely to receive compensation faster. Those who have not complained will be contacted by their lender within six months of the scheme starting and asked if they want to “opt in” and have their case reviewed.
Meanwhile, those who do not receive a letter – for example, because lenders no longer have their details and cannot trace them – will have a year from the scheme starting to make a claim.
Consumers who have already been compensated for complaints covered by the scheme would be excluded.
In many cases the payouts will be boosted by interest – based on the annual average Bank of England base rate a year plus 1% from the date of overpayment to the date compensation is paid. The average amount of interest people would get is estimated at 2.09%.
The FCA will run an advertising campaign to raise awareness of the scheme.
The Finance & Leasing Association, a leading trade body for the motor finance sector, said: “We remain concerned that the costs are too high, but this is a 360-page document which will require much scrutiny over the coming weeks as we assess the best way to get redress to those consumers who lost out, while keeping the motor finance market stable and competitive.”

source