Experts warn millions of motorists face being short-changed
Millions of drivers embroiled in the car loans scandal could lose out on roughly £500 each under a compensation scheme being devised by the City watchdog, warns a law firm. The dispute revolves around compensation owed to motorists who entered into car finance agreements between April 2007 and November 2024 without full disclosure about the commission paid by lenders to brokers, typically car dealerships.
Law firm Slater & Gordon has launched a scathing critique of the Financial Conduct Authority (FCA), accusing it of shielding the banks and finance firms implicated in the scandal by capping consumer compensation. The firm alleges that the FCA’s proposed redress formula will leave as many as 14.2 million car buyers short-changed by a total of £8.1 billion.
The regulator stands accused of doing “a big favour to the very banks that caused the problem and that are reporting huge profits”. According to the FCA’s current plans, the average payout to affected drivers would be around £700.
However, Slater & Gordon argues that a fair figure should be closer to £1,200 – leaving motorists approximately £500 worse off than they ought to be. The FCA estimates that lenders will shell out around £11 billion in total, comprising £8.2 billion in compensation and £2.8 billion to administer the scheme.
Payouts on up to 14 million unfair agreements could commence next year.
The major banks are already preparing for the financial blow. Lloyds, the dominant force in car finance through its Black Horse brand, has earmarked £1.95 billion, whilst Barclays, Santander and Close Brothers are also staring down substantial bills.
Slater & Gordon, which claims to have enlisted “hundreds of thousands” of affected motorists, has taken particular aim at the FCA’s proposed “hybrid” compensation formula and the interest rate to be applied.
Under the proposals, compensation would be worked out as an average of the total commission paid and the FCA’s estimate of consumer loss. Interest would be added at base rate plus 1%, rather than the 8% frequently used in personal finance redress cases.
Research commissioned by the firm from WPI Economics indicates the hybrid formula alone would slash payouts by £3.5 billion, with the lower interest rate trimming off a further £4.6 billion.
Slater & Gordon said: “The scheme systematically undervalues the harm suffered, despite clear legal precedent indicating that full commission repayment with appropriate compensatory interest is the correct remedy.”
Industry bodies see things differently. The Finance and Leasing Association has argued the scheme should be tightened in the opposite direction, excluding millions of car buyers who it claims suffered no loss and had no unfair relationship.
The FCA wrapped up its consultation on 12 December and is set to nail down the compensation terms by the end of February. Lenders are rumoured to be mulling over a judicial review if they deem the scheme too lavish, while law firm Slater & Gordon has hinted at legal action if it’s not generous enough.
An FCA spokesperson said: “We’re considering feedback to the consultation which will help us refine our proposals to ensure any scheme is fair and robust. Our scheme aims to be simple for people to use. That means on such a complex issue not everyone will get everything they would like.
“We said when we launched the consultation that consumers can choose not to use the compensation scheme and instead go to court, where they may get more or less compensation. However, the outcome of a court claim is uncertain and, accounting for legal fees they may pay, many consumers could end up with less. The FCA’s scheme is also likely to be faster and simpler than going to court.”