Car purchasers may be eligible for over £8 billion in compensation as per a proposed reimbursement plan by the financial regulator. The Financial Conduct Authority (FCA) has suggested that funds may begin to be distributed for an estimated 14 million unfair motor finance agreements starting next year, with an average expected payout of around £700 per agreement.
The FCA introduced details of a comprehensive compensation scheme following revelations that some car dealerships failed to disclose they were receiving commissions from lenders on certain car finance deals they were selling. This initiative was prompted by a Supreme Court ruling that clarified an aspect, potentially entitling even more individuals to compensation.
Although the anticipated payout is less than the initial estimate of £9 billion to £18 billion, it is projected to be one of the largest compensation schemes in the financial sector. Analysts anticipate that companies will incur an additional £2.8 billion in costs, bringing total industry expenses to approximately £11 billion.
Notably, the proposed scheme would be cost-free for consumers, addressing concerns about claims management companies that might claim a significant portion of any compensation. The FCA emphasized that individuals can lodge their complaints directly using a template letter available on the FCA’s website to avoid losing a substantial portion of their owed compensation by involving a claims manager or legal firm.
The FCA believes that the scheme would benefit lenders by averting potential legal and administrative expenses that could arise if cases were to go through courts or the Financial Ombudsman Service. The scheme is designed to cover motor finance agreements made between April 6, 2007, and November 1, 2024, where commissions were paid by the lender to the broker, often the car dealer.
Nikhil Rathi, the FCA’s chief executive, stated that the scheme aims to provide fair compensation to customers of non-compliant motor finance lenders following legal clarity. The FCA envisions a straightforward process for both individuals seeking compensation and lenders facilitating the scheme.
Once the scheme is operational, lenders are expected to reach out to individuals who have previously reported being mis-sold car finance. Those who have not filed complaints should receive contact from their lenders within six months of the scheme’s implementation to determine if they wish to participate in the review process.
Compensation will only be applicable if buyers were not informed about specific arrangements between the lender and the broker or dealer, such as discretionary commission agreements, chunky commission structures, or contractual ties granting lender exclusivity.
According to the FCA, the estimated payout impacts about 89% of the market involving more than 30 lenders. While approximately four million loan agreements have been the subject of complaints, an additional 10 million agreements have yet to be addressed in the process.
Legal firm Bott and Co expressed its commitment to ensuring that the proposed scheme delivers fair outcomes for affected consumers and emphasized the importance of adequately addressing the issue to provide meaningful compensation.
Zoe Morton, financial services director at consulting firm RSM UK, suggested that the FCA’s actions could have broader implications beyond motor finance, potentially leading to further scrutiny of commission structures in various financial sectors to prevent consumer harm.