A major compensation scheme has been launched by the Financial Conduct Authority (FCA), targeting hidden commission practices in car finance deals dating back to 2007. With an average payout of £700 per agreement, the scheme may reach 14 million cases, making it one of the largest consumer redress efforts in the UK since the PPI scandal.
The issue centres on undisclosed commission payments between car dealers and lenders, which the FCA says led many customers to unknowingly pay higher interest rates. While legal proceedings have narrowed the scope of potential compensation, the new scheme offers a streamlined process aimed at delivering redress without lengthy court battles.
Discretionary Commissions and Unlawful Practices
The FCA’s investigation into “Discretionary Commission Arrangements (DCAs)” revealed that many car finance brokers had the power to adjust interest rates on behalf of lenders — a practice that increased their own commission but often to the detriment of the customer.
According to the FCA, 44% of motor finance agreements signed between April 2007 and November 2024 were potentially affected. These arrangements, typically found in Hire Purchase (HP) and Personal Contract Purchase (PCP) deals, were outlawed in January 2021, following mounting pressure and a court ruling which found such deals to be “unfair” if not transparently disclosed.
The Supreme Court intervened in August 2024, partially overturning a previous ruling and limiting the legal liability of lenders in some cases. However, the Court upheld that a lack of informed consent created unfair lending relationships, supporting the FCA’s stance that redress was still necessary.
Under the scheme, the average payout of £700 corresponds to around 17% of the interest paid on a mis-sold loan. Although this falls below initial estimates of up to £950, the FCA argues that a simplified and accessible process outweighs the complexity and inconsistency of legal action.
Who Qualifies and How the Scheme Works
The FCA says the scheme will be open to anyone who financed a car through HP or PCP within the specified period, provided their agreement involved one of the 30 major lenders representing 89% of the market.
Roughly four million complaints have already been lodged, and those cases will be prioritised once the scheme goes live — expected in early 2026. Lenders will have three months to respond to existing complaints and six months to reach out to eligible but inactive customers. Individuals not contacted will have one year to file a claim directly.
According to Martin Lewis, founder of MoneySavingExpert.com, the redress will be largely automatic for those who have already raised complaints. “…It’s by far the simplest form of redress scheme we’ve seen,” he said in a recent video.
The FCA has advised customers not to use claims management companies, which may take unnecessary fees. All redress processes will be free of charge, and compensation will include interest at an average rate of 2.09%, based on the Bank of England base rate plus 1%.
