The Financial Conduct Authority (FCA) has admitted a series of legal challenges threatens to delay its planned compensation scheme, which could see motorists receive an average payout of £829.
The watchdog estimates around 12.1 million car finance agreements could be eligible for compensation under the proposals.
Why payouts are being delayed
The compensation scheme centres on controversial “hidden commission” arrangements, formally known as discretionary commission arrangements (DCAs).
The FCA believes many drivers were not given a fair deal because dealers and brokers could earn more commission by increasing the interest rate charged on finance agreements.
The regulator had hoped to begin compensation payments much sooner, but court action from several firms has thrown the timetable into doubt.
Sarah Pritchard, the FCA’s deputy chief executive, told MPs that legal challenges would increase costs and significantly delay payouts.
“I want to be straightforward that the legal challenge will add delay and extra costs to the scheme as a whole,” she said.
“If the scheme goes ahead, the delay, we believe, will result in payments not before 2027.”
Who is challenging the compensation scheme?
Four separate legal challenges have been launched against the FCA’s plans.
Among those seeking to block or alter the scheme are finance businesses linked to major car manufacturers including Volkswagen and Mercedes-Benz, as well as a consumer group.
The firms argue that aspects of the FCA’s proposed redress scheme are unlawful.
The compensation programme is expected to cost the motor finance industry around £9.1 billion.
Could drivers face even longer waits?
The FCA has also warned there is a possibility that parts of the compensation scheme could be struck down by the courts.
If that happens, the regulator may be forced to abandon its planned mass compensation approach and instead deal with complaints individually.
That could create a huge administrative burden.
According to FCA estimates, up to 19 million complaints could need to be handled separately if no redress scheme is available.
The watchdog believes that approach would add around £6 billion in costs for lenders and could take another three years to complete.
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Hope for some drivers
Despite the delays, the FCA says it is exploring whether some consumers could receive compensation earlier.
Ms Pritchard told MPs the regulator is considering options for people who would prefer to receive money sooner rather than wait for the full scheme to be finalised.
“Consumers have been waiting a very long time to be compensated and, one way or the other, they need to be compensated,” she said.
The FCA has already spent more than £20 million developing the compensation programme and expects legal costs to continue rising as the court challenges progress.
For now, motorists who believe they were affected by hidden commission arrangements may have to wait until the outcome of the legal battles becomes clearer before finding out when compensation will arrive.