Many of these loan agreements included discretionary commission arrangements (DCAs) where a car dealer received a fee from lenders based on the interest rate charged to the customer.
This arrangement was often not disclosed and the FCA said it provided an incentive for a buyer to be charged higher interest rates than necessary, leaving them paying too much.
In 2021 the FCA banned these deals and on Monday it said: “We need to draw a line under the past and support a healthy motor finance market for the future.”
Consumers will also be considered for compensation if they were not told about two other arrangements between the lender and the car dealer.
These are:
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a high commission arrangement where at least 39% of the total cost of credit, including interest and fees, and 10% of the loan was paid to the dealer
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contractual ties that gave a car finance lender exclusivity or the right of first refusal
The regulator’s central compensation scheme allows people to complain and potentially receive compensation for mis-sold deals, without the need for a lawyer or to go through the courts.
Some may still decide to take a legal route.
Major lenders have set aside tens of millions of pounds to cover the cost of compensation.
Some lenders have questioned whether the FCA has the authority to implement a redress scheme for car loans agreed before 2014 because it only took over regulating the consumer finance market in April that year.
Prior to that, the Office for Fair Trading was responsible for overseeing consumer finance.
The FCA says it has the powers to include agreements before 2014 but has split the compensation scheme into two as legal protection.
One will cover car finance agreements between 6 April 2007 and 31 March 2014.
The other will cover deals from 1 April 2014 and 1 November 2024.
“If the earlier period is subject to legal challenge on these grounds, redress for consumers with agreements from April 2014 shouldn’t be delayed,” the FCA said.