The Financial Conduct Authority (FCA), which is the UK government’s independent regulator of finance companies, has published its plans for a compensation scheme for unfair car finance agreements.
Up to 14 million agreements over a 17-year period from 2007 to 2024 have been deemed ‘unfair’ by the FCA, meaning that customers should be entitled to compensation to rectify that unfairness. The estimated bill for this is about £8 billion, meaning an average payment of about £700 per claim (although individual payments may vary considerably).
The FCA plans are now out for consultation for the industry to check its numbers and raise any objections. Assuming that all goes smoothly, lenders should be able to start paying compensation to customers in early 2026.
What exactly is an unfair contract?
The FCA has settled on three definitions for what makes a contract unfair for the purposes of this scheme. Contracts only have to fulfil one of the three conditions, although some may tick two or even all three boxes.
- A discretionary credit arrangement (DCA). This is where the dealership had the ability to increase the interest rate payable by the customer over and above what the finance company had already approved. By increasing the rate and making the finance agreement more expensive for customers, they earned extra commission.
- Excessive commission. This is where the commission paid by a lenders to a dealer was considered excessive, usually as a result of interest rates being set unreasonably high and making the loans unnecessarily expensive for customers.
- Inadequate disclosure of relationships. This is where the dealer did not tell the customer that it had an exclusive or near-exclusive relationship with a particular lender, so the dealer wasn’t checking multiple lenders for the best possible deal.
The first one, discretionary credit arrangements, are pretty much a slam dunk. To avoid paying out any compensation, the lenders have to prove that dealers did not ratchet up interest rates to increase their own commission – essentially saying that they’re guilty until proven innocent.
When it comes to defining “excessive” interest and commissions, the FCA has come up with a formula based on how much money was borrowed and the overall cost of borrowing. Many of the customers who would fall into this category would be sub-prime customers, who didn’t have a lot of options to shop around for better deals and were borrowing relatively small amounts for used cars.
Inadequate disclosure addresses one of the concerns brought before the Supreme Court in July. Although the Court ruled that not clearly disclosing commissions was not unfair in itself, the FCA has made a point of highlighting exclusive relationships between dealers and lenders, which were kept secret from customers.
How will I know if I’m eligible for car finance compensation?
The FCA’s plans place responsibility firmly on the lenders to contact any eligible customers to invite them to make a claim. So if you haven’t moved house or changed phone numbers since you had a car finance agreement, they should be writing to you or calling you if you’re eligible. Also, if you’ve already lodged a complaint or enquiry with your finance company since this whole saga began, they’ll have your details to get in touch.
If your contact details have changed, the finance company may still be able to track you down as the FCA expects them to make a concerted effort to do so. They will contact the dealership and any other third-party data sources available to try and identify you. However, you can also contact the finance company yourself, and all of them will have dedicated pages on their websites for you to ask to be included for consideration in the compensation scheme.
Should I sign up for the schemes being advertised?
No. There should be no need for customers to pursue separate legal cases or join class actions. The FCA has published clear guidelines on how compensation payments should be calculated to adequately compensate the loss incurred, and its official scheme should be easy, free and fair.
While there is nothing to stop you from signing up with one of the many claims management companies advertising extensively on TV, radio and social media, there is not likely to be any advantage in doing so. Individual claims and class actions would be slower, more expensive, and far less predictable.
Beware of scammers
Unfortunately, but inevitably, we’ve already seen criminals trying to take advantage of this. People have reported getting phone calls from scammers claiming to be from finance companies, ringing with “good news” that you have been awarded compensation for your car loan. All you need to do is hand over your bank details…
Of course, none of this is true. Your finance company may call you, but they won’t be asking for your bank details. They will also formally write to you with relevant information, so you will be able to verify anything they tell you. If you have any doubt as to whether any contact is legitimate, look up the website for the finance company, get their phone number and contact them yourself.
So what happens next?
The FCA’s plan is out for consultation with the industry, which should take until about mid-November. Assuming that no problems are identified, the FCA plans to publish the final rules by early 2026.
The consultation isn’t about whether there should be a compensation scheme – the FCA has already made clear that this is the path it wants to take – but the nuts and bolts of how the scheme is going to work. So the lenders won’t be arguing about the scheme itself, but rather about whether the FCA’s calculations are flawed and require further work.
One the scheme is finally signed off, the FCA expects finance companies to start immediately and work quickly in executing it. The first people to be contacted should be those who have already lodged a complaint with their finance companies, followed by those who have not yet complained.
If you don’t hear from your finance company and you think that your agreement might be considered unfair based on the descriptions above, you will have 12 months from the scheme’s start date to make contact with your lender and lodge a complaint.
If you have already received a payment from your lender for unfair treatment as defined by this scheme, you won’t be able to claim again. If you have already taken your complaint to the Motor Ombudsman Service, you can’t participate in this scheme and your case will be heard by the Ombudsman instead. If the Ombudsman has already rejected your case, you also can’t join this scheme.
If you join a class action or engage a law firm to represent you, that will also mean you can’t be part of this scheme. You can choose to withdraw from any class actions, but you will quite probably have to pay hefty fees to do so, which may mean that it’s not worth it.
