For nearly two decades millions of people were mis-sold car finance deals, in a scandal that saw millions of customers overcharged by their lenders. Now a new scheme has been set up to compensate motorists, as ITV News Consumer Editor Chris Choi reports
Compensation payments averaging over £800 are due on over 12 million mis-sold car finance deals, the Financial Conduct Authority (FCA) has said.
On Monday, the FCA published its long-awaited compensation scheme covering the mis-selling of car finance deals that had secret commission payments within the deals.
The FCA said the deals meant consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.
Nikhil Rathi, chief executive of the FCA, said: “We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5 billion back into people’s pockets.“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure.
“Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”
Pay outs will start this year. Credit: PA
How many people are eligible for compensation?
The FCA said 12.1 million agreements made between April 6 2007 and November 1 2024 are now eligible for compensation.
This is down from the 14m agreements the FCA previously said would be covered under the scheme.
How much are people owed?
The FCA said the average payout will be £829, but this will depend heavily on the finance deal that was agreed, when it was agreed, and the money involved.
They said they expect 75% of eligible consumers will make a claim, costing the industry £7.5bn.
The £829 figure is higher than previous estimates the FCA published as they discussed their plans for the scheme, with the last updated putting it at £700.
This is partly due to the increased interest on the repayments, which has now been raised to a minimum of 3% per year.
Payouts are expected to begin this year, with the FCA giving car finance companies until the end of August to organise the implementation of the compensation schemes, but many will begin sooner.
How can you apply for compensation?
The FCA advises that people submit a complaint to their lender using a template letter on its website.
The final plan has separated the redress process into two schemes, with one relating to loans taken out after April 1 2014, and the other for those prior to this date.
Lenders will then have to respond within three months of launching their compensation scheme.
Lenders will also be expected to reach out to those customers who have not complained and who may be eligible. People will need to reply to say if they want their case to be assessed.
Craig Tebbutt, a financial health expert for Equifax UK, said research by his organisation found that “many consumers don’t know how to check their eligibility and expect the process to be a hassle, with old or missing paperwork being a real barrier”.
Much like the PPI scandal, the anticipation of the scheme being launched has also seen several firms approaching people, offering their legal services to process their compensation claim, but the FCA has made it clear that this is not necessary.
It warns that people could be subject to unnecessary fees if they involve legal firms, and could risk losing a portion of their compensation as a result.
The scheme is expected to impact millions. Credit: PA
How did we get here?
Many cars are bought using car finance deals, with around two million sold by this method each year.
These typically involve customers agreeing to pay an initial deposit and then monthly instalments with interest payments.
Most of the car finance deals under scrutiny involve so-called discretionary commission arrangements (DCAs), which were stopped by regulators in 2021.
This refers to arrangements whereby brokers, including car dealers, were able to increase interest rates on car loans so they could get more commission.
In October last year, the Court of Appeal ruled that secret commission payments made before 2021 without the motorist’s fully informed consent were unlawful.
However, two lenders, FirstRand Bank and Close Brothers, took the row to the Supreme Court, telling a three-day hearing in April that the decision was an “egregious error”.
The FCA also intervened in the case, telling the UK’s highest court that the Court of Appeal ruling “goes too far”, while the three motorists opposed the challenge.
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In August, the Supreme Court ruled in favour of the finance companies, mostly.
It meant that the anticipated massive payout scheme was hugely pared back and was seen as a victory for the car finance companies and car showrooms.
However, the Supreme Court did uphold one of the complaints, saying the customer’s relationship with the finance company was unfair.
This led to the FCA setting out the scheme that was published on Monday.
The watchdog said its free scheme is the quickest and simplest way for consumers to access compensation and for lenders to administer payouts.
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