Millions of potential car buyers may soon receive part of an estimated £8 billion as part of a compensation plan proposed by the City watchdog. The Financial Conduct Authority (FCA) expects payouts to begin next year on approximately 14 million unfair motor finance agreements, with an average payout per agreement estimated at around £700.
This initiative follows the FCA’s findings that some motor dealers did not disclose to buyers that they were receiving commissions from lenders on certain car finance deals sold. The FCA intervened after a Supreme Court ruling shed light on another issue that could have extended compensation eligibility to more individuals.
The core issue revolves around the lack of disclosure to car buyers regarding commissions received by brokers, typically car dealers, from lenders for arranging loans or finance agreements. The FCA discovered that motor finance companies violated laws and regulations by withholding this crucial information, resulting in consumers being deprived of the opportunity to negotiate better deals and potentially paying higher loan costs.
The proposed industry-wide compensation scheme, subject to potential modifications based on feedback, aims to be operational by early next year. It covers motor finance agreements made between April 6, 2007, and November 1, 2024, involving commission payments from lenders to brokers for both new and used cars. The FCA estimates that 44% of agreements since 2007 could be eligible for compensation.
With an expected 14 million unfair motor finance agreements targeted for payouts starting next year, individuals who engaged in approximately four million loan agreements have already lodged complaints, leaving 10 million potential claimants yet to participate in the process. The FCA anticipates average payments of around £700 per agreement, with a total compensation estimate of £8.2 billion.
Consumer advocate Martin Lewis highlighted that for every £1,000 of interest charged, claimants could receive £170 on average. The FCA emphasized that the proposed scheme would be free for consumers to participate in, addressing concerns about claims management companies potentially taking a significant portion of payouts.
Once the scheme is active, lenders are expected to reach out to individuals who have previously reported being mis-sold car finance. Those who have not lodged complaints should be contacted within six months of the scheme’s launch to opt-in for case review.
Eligible individuals who have signed up with claims management companies can opt for the free scheme but might face exit fees. Claimants have up to a year from the scheme’s start to make a claim if they do not receive a notification letter from their lender.
The FCA’s upcoming advertising campaign aims to raise awareness of the scheme, emphasizing that compensation will be due if buyers were not informed about specific arrangements between lenders and brokers or dealers. These undisclosed arrangements include discretionary commission agreements, high commission percentages, or contractual ties favoring lenders.
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