The Financial Conduct Authority (FCA) is set to roll out a compensation scheme for millions affected by unfair car finance agreements, with payouts expected to start in 2026.
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Up to 30 Million Car Finance Deals Could Qualify for Compensation
The Financial Conduct Authority (FCA) has announced that approximately 30 million car finance deals made between 2007 and 2020 may be eligible for compensation due to unfair practices by lenders.
This significant decision aims to address issues related to undisclosed commissions that have affected consumers across the UK.
Details of the Compensation Scheme
In a statement to the Treasury Committee, FCA Chief Executive Nikhil Rathi highlighted the magnitude of the issue.
He stated, “During the period that we’re looking at – from 2007 through to approximately 2020 – there are around 30 million agreements… and all of those will be eligible for compensation.” The FCA is currently consulting on an industry-wide redress scheme to compensate consumers who may have been harmed by these practices.
The FCA has determined that many motor finance firms may have violated legal obligations by failing to adequately disclose commission structures paid by lenders to car dealers selling the loans. Rathi noted that discretionary commission arrangements (DCAs) allowed brokers and dealers to inflate interest rates, imposing unfair financial burdens on consumers. “A very significant proportion of those agreements… we do think probably breached the law when it came to disclosure and, by extension, unfair relationships,” Rathi remarked.
Timeline and Expected Outcomes
The consultation process is expected to commence by early October, with Rathi expressing optimism that compensation payments could begin as soon as next year. He commented, “We hope that compensation, where it is due, can start to be paid next year.” The FCA is working diligently to ensure that misled consumers receive fair compensation for their losses.
However, the FCA has advised consumers against relying on claims management companies (CMCs) or legal firms to navigate the compensation process. Rathi cautioned about potential fraudsters taking advantage of the situation, stating, “Some of the CMCs and law firms are putting out high-pressured advertising suggesting to consumers they may get more than £4,500, and numbers like that.” He added that the FCA has intervened in numerous promotions from CMCs, requesting modifications to misleading advertisements.
Potential Financial Impact
The FCA estimates that the overall cost of the compensation scheme could range between £9 billion and £18 billion, with individual payouts likely averaging around £950. Rathi informed MPs that at least 38 motor finance firms in the UK would be involved in administering the scheme.
Following a Supreme Court ruling in August that clarified lenders’ responsibilities regarding hidden commission payments, the FCA reiterated its commitment to consumer protection. Rathi stated, “It is clear that some firms have broken the law and our rules, and it is fair for their customers to be compensated.”
As the FCA progresses with this initiative, it aims to rectify past injustices in the car finance industry and restore consumer trust in financial institutions.
