Millions of motorists who were mis-sold car finance agreements are due to receive £829 on average in compensation, it has been announced.
But why is this happening, and who can make a claim? Sky News explains…
The scandal
When you buy a car on finance, you are effectively loaned the money for the vehicle, which you pay off in monthly instalments. These loans carry interest, organised by brokers (the people who sell you the finance plan).
These brokers earn money in the form of a commission (which is a percentage of the interest payments).
Before January 2021, some car finance lenders had what was called a “discretionary commission arrangement” (DCA) with brokers.
Under these arrangements, brokers earned more commission if buyers were put on a higher interest rate – this incentivised sellers to maximise interest rates, which meant many were unfairly charged too much.
The Financial Conduct Authority (FCA) banned this practice in 2021, but many consumers complained they had been overcharged before the ban came into place.
Following legal action and an investigation, the watchdog said that car finance firms had either broken the law or its rules by not properly informing customers about commission paid by lenders.
Who will be eligible for compensation?
Car finance agreements taken out between 6 April 2007 and 1 November 2024, where commission was payable by the lender to the broker, will be considered for compensation.
But these will be split into two separate schemes. One will cover deals from 6 April 2007 to 31 March 2014, and the other covers deals from 1 April 2014 to 1 November 2024.
Around 12.1 million car finance deals will be eligible for compensation, with the average payout coming to £829, the FCA said.
People will only be considered for compensation if they were not told details of at least one of three car finance arrangements between their lender and their broker.
These three arrangements are:
1. A discretionary commission arrangement (DCA) – this would have allowed the broker to adjust the interest rate the customer would pay to obtain a higher commission.
2. A high commission arrangement – this covers any deals where the commissions were equal to or greater than at least 39% of the total cost of credit and 10% of the loan.
3. Contractual ties – these arrangements would have seen a lender given exclusivity or a right of first refusal.
This will apply except in cases where the lender can prove there were visible links with the manufacturer and dealer.
However, there are some exceptions.
Cases will be considered fair if:
- The commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date.
- The borrower wasn’t charged interest.
- The DCA wasn’t used to earn discretionary commission.
- The lender can prove, in certain limited circumstances, that it was fair not to disclose one of the arrangements above or that the consumer did not suffer any loss.
How do I get compensation?
If you had a car finance agreement between 6 April 2007 and 1 November 2024, it’s worth filing a complaint with your lender, if you have not done so already.
Consumer champion Martin Lewis told BBC Radio 4 that many people will “have no idea” if they were mis-sold car finance unless they do.
The FCA advises that people submit a complaint to their lender using a template letter on its website.
It said there was no need to use a claims management company or law firm, warning that doing so could mean you lose over 30% of the money you get.
Those who have already complained, or who complain by 31 August, are most likely to be among the first to be compensated.
However, even if you do not lodge a complaint, lenders will also be expected to reach out to those customers who may be eligible.
How long do lenders have to tell drivers how much they’re owed?
To give firms time to prepare, the FCA has applied a “short implementation period”.
This means they do not have to take action before 30 June for loans taken out from 1 April 2014 or 31 August for those taken out earlier.
From these dates, lenders will have three months to inform drivers whether they are owed compensation and how much.
Customers who have made inquiries about their car loans should be told whether they are eligible and how much they could receive by the end of this year.
Firms also have until the end of 2026 to contact people with affected car loans dated since April 1 2014, who have not made a complaint.
They will have until the end of February 2027 to complete this for those with older loan agreements.
Lenders will only contact people who have not complained if they are likely to be owed money.
Consumers must respond within six months of these dates if they wish to join the relevant schemes.
Anyone not contacted has until 31 August 2027 to make a claim.
When will compensation be paid?
Millions of people should receive compensation this year, the FCA said.
Lenders should aim to hand over payments to people who have already complained, or those who complain before the end of the implementation period, by January 2027.
This group of people will be the first to receive payments.
Nikhil Rathi. File pic: Reuters
Nikhil Rathi, CEO of the FCA, said lenders, if they wanted to, could start handing out payments tomorrow, now that the rules of the redress scheme had been laid out.
But he warned that this was very unlikely.
“We will be pleased if lenders can start moving much faster, as consumers have been waiting a long time now,” he said.
The FCA expects the vast majority of claims to be settled by January 2028.
But consumers who are concerned that their lender is not following the rules of the scheme can complain to their lender or the Financial Ombudsman Service.