Millions of British car owners who took out finance agreements between April 2007 and November 2024 could be left short-changed under a compensation plan currently being drafted by the Financial Conduct Authority (FCA). The issue centres on undisclosed commissions paid by lenders to car dealers, which allegedly inflated borrowing costs for consumers.
The FCA is finalising a redress scheme intended to settle the long-running dispute, but the proposals have drawn sharp criticism from legal and consumer advocates. According to reports, law firm Slater & Gordon has accused the regulator of offering banks undue protection by limiting how much affected motorists can reclaim.
Dispute Over Compensation Formula
Under the FCA’s proposed framework, compensation would be calculated using a “hybrid” formula that averages the total commission paid and the regulator’s estimate of consumer loss. Interest would be added at the Bank of England base rate plus one percent, a significant reduction from the eight percent rate often used in personal finance redress cases.
According to Slater & Gordon, this approach could leave as many as 14.2 million car buyers around £500 worse off than they should be, with the average payout set to be about £700 instead of £1,200. The law firm argues that the formula undervalues the harm suffered by consumers and contradicts established legal precedent, which it says supports full repayment of commissions with appropriate interest.
Research conducted by WPI Economics and cited by Slater & Gordon found that the hybrid calculation alone could reduce total compensation by £3.5 billion, while the lower interest rate would further trim payouts by an additional £4.6 billion. The FCA estimates lenders will pay out a total of £11 billion, including £8.2 billion in compensation and £2.8 billion in administrative costs.
Industry groups have taken a different view. The Finance and Leasing Association maintains that the scheme should be narrowed to exclude millions of motorists who, in its assessment, did not suffer any financial loss or unfair relationship. The consultation process, which closed on 12 December, is expected to lead to finalised terms by the end of February next year.
Legal Challenges Looming
Major UK banks are already preparing for the financial impact. According to the sources, Lloyds Banking Group, which dominates the car finance market through its Black Horse brand, has set aside £1.95 billion in anticipation of payouts. Barclays, Santander and Close Brothers are also expected to face substantial costs once the scheme is implemented.
Both lenders and consumer representatives are considering legal action depending on the final outcome. Lenders may seek a judicial review if the scheme is viewed as overly generous to claimants, while Slater & Gordon has indicated it could pursue litigation should the final version prove insufficiently compensatory.
An FCA spokesperson has said the regulator is reviewing feedback from the consultation to ensure the scheme is fair and practical. The spokesperson added that affected consumers who disagree with the redress scheme may opt to take their case to court, where they could potentially receive a higher or lower payout depending on the outcome. However, the FCA maintains that its approach will likely provide a simpler and faster route to compensation than lengthy legal proceedings.
