The issue centres on hidden commissions paid to car dealers and brokers, which in some cases increased the interest rate paid by customers. While the Financial Conduct Authority (FCA) has announced an industry-wide compensation programme, some legal experts argue that the planned payouts may not reflect the full losses suffered by motorists.
FCA Redress Scheme to Cover Millions of Finance Agreements
The Financial Conduct Authority confirmed that a redress scheme will apply to around 12.1 million car finance agreements taken out between 2007 and 2024. According to the regulator, lenders are expected to pay around £7.5 billion in compensation, with the average payout estimated at £829 per agreement.
The compensation relates to discretionary commission arrangements, where brokers and dealers were able to adjust interest rates in order to increase their commission without clearly informing customers. These arrangements were banned in 2021 after concerns that consumers were being treated unfairly.
The FCA expects around 75 per cent of eligible consumers to make a claim, and lenders will also face approximately £1.6 billion in administrative and operational costs linked to the scheme. According to the FCA, most compensation payments are expected to be completed between 2027 and early 2028, although the first payments could begin after implementation deadlines set for June 30 and August 31.
FCA chief executive Nikhil Rathi stated that firms are not prevented from starting payouts earlier, although companies are expected to review the full scheme before issuing payments.
Legal Experts Claim Court Claims Could Result in Higher Payouts
Some legal specialists have criticised the compensation scheme, arguing that motorists may receive less money than they could obtain through court action. According to Darren Smith, managing director of Courmacs Legal, the scheme does not always reflect how much consumers were overcharged through hidden commission arrangements.
One court case cited involved a motorist who had taken out finance for a Citroen C3 in June 2020. A judge at Doncaster County Court awarded £2,642, which included repayment of the hidden commission and compensatory interest at eight per cent. After legal fees, the customer received £1,754, more than double the average payout suggested under the FCA scheme.
Legal representatives have argued that the redress scheme allows lenders to calculate compensation using a standard formula, which may result in lower payments for some consumers. According to industry experts involved in ongoing claims, drivers who pursue legal action may in some cases recover higher amounts, although this route can involve legal costs and longer timelines.
Consumers will have to choose between accepting compensation through the FCA scheme or pursuing court action, as they cannot do both. According to the FCA, once a consumer accepts payment through the redress programme, they will generally lose the right to take legal action over the same finance agreement.
The compensation programme remains one of the largest consumer redress schemes in the UK financial sector, with millions of drivers expected to receive payments over the coming years as lenders process claims and calculate compensation.
