FCA Announces Landmark Redress for Car Finance Mis-Selling
Millions of UK drivers could be entitled to compensation under the newly proposed FCA car finance compensation scheme, which aims to address years of alleged mis-selling by lenders and brokers. The Financial Conduct Authority (FCA) estimates that more than 14 million car finance agreements, signed between April 2007 and November 2024, may be affected — with payouts averaging £700 per claim.
The regulator says lenders could face a collective bill of £8.2 billion, significantly lower than the initial £10 billion forecast earlier this year. The FCA car finance initiative follows years of complaints about unfair commission deals between car dealerships and finance providers.
How the FCA Car Finance Compensation Scheme Works
The car finance compensation scheme FCA proposal would automatically review millions of loans where drivers were charged higher interest rates so that dealers could earn bigger commissions — a system banned in 2021. Known as discretionary commission arrangements (DCAs), these deals often left consumers paying hundreds or even thousands more than they should have.
Under the new FCA car finance compensation scheme, lenders will contact customers directly:
- Those who already complained will be prioritised for faster payouts.
- Customers who haven’t complained yet will receive a letter inviting them to opt into the scheme within six months.
- Drivers who can’t be contacted will have one year from the start of the scheme to make a claim.
The scheme will be free to access, but interest added to compensation will be far lower than that paid in the PPI scandal.
Average Payouts Fall Below Expectations
While the regulator initially suggested average redress could reach £950 per agreement, that figure has now been revised down to £700. Critics argue this may not reflect the true losses suffered by consumers.
Consumer lawyer David Bott, of Bott and Co, said: “The average payout figure of £700 raises serious questions about whether this truly compensates drivers for the financial harm they suffered.”
However, lenders claim that the proposed payouts are still too high. Shanika Amarasekara, Chief Executive of the Finance and Leasing Association, argued: “We remain concerned that the costs are excessive and could have wider implications for credit availability.”
FCA Defends the Scheme as “Fair and Balanced”
FCA chief executive Nikhil Rathi defended the decision, saying: “It’s time customers get fair compensation. We recognise there will be a range of views, but on such a complex issue, not everyone will get everything they would like.”
According to the regulator, about 44% of all car finance agreements since 2007 may qualify for some level of compensation.
Prominent money expert Martin Lewis, founder of MoneySavingExpert (MSE), welcomed the move but urged lenders to cooperate instead of delaying the process. “If they want clarity, then don’t fight this,” he said. “Let’s all move on.”
The MSE platform has been flooded with questions from consumers wondering how to check if their car finance deal is eligible. Lewis encouraged motorists to visit the FCA’s official page or contact their lender directly.
Impact on the Car Finance Industry
The FCA car finance update has sent shockwaves through the motor industry. Around two million vehicles are sold annually through finance agreements in the UK, meaning the implications for lenders, dealers, and consumers are huge.
Following the Supreme Court ruling in August 2025, which narrowed the scope of eligible claims, the FCA’s approach is now seen as a compromise between fairness and financial stability. Critics, however, say many drivers will receive less than they deserve.
Consumer rights advocate Alex Neill called it “a pivotal moment for the regulator,” adding that compensating victims of car finance mis-selling is “long overdue.”
When Will Drivers Receive Compensation?
If approved, the FCA car finance compensation scheme could begin operating by early 2026, with payouts following shortly after. However, some motorists may have to wait months if lenders struggle to verify contact details or review historic agreements.
Those who used claims management companies will have to decide whether to stay with their representatives — who typically take a fee — or switch to the FCA’s free scheme.
What It Means for Motorists
The car finance compensation scheme FCA represents one of the largest financial redress programmes since PPI. For millions of drivers, it could mean long-awaited justice. However, consumer advocates continue to push for faster resolutions and more transparent compensation calculations.
If successful, the FCA car finance compensation scheme will serve as a landmark example of regulatory accountability in the UK’s consumer finance sector.
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