Millions of customers will receive compensation this year as the FCA goes ahead with a redress scheme for those treated unfairly by motor finance firms.
The FCA found that some finance firms broke the law by failing to disclose important information. As a result, consumers were denied the chance to seek a better deal and, in some instances, paid more for their loan.
The regulator has made several changes to the scheme in response to conflicting feedback from consumers, their representatives, firms, manufacturers and industry bodies.
The eligibility criteria have been tightened, average compensation increased for older agreements, and a minimum 3% compensatory interest rate per annum added. Payouts will be capped in around 1 in 3 cases to ensure no one is put in a better position than had they been treated fairly.
12.1 million agreements made between 2007 and 2024 are now eligible for compensation, fewer than under the FCA’s original proposals. The average payout has increased to around £830 per agreement.
The FCA estimates that 75% of eligible consumers will make a claim. If so, total redress paid would be £7.5bn, with added non-redress costs of £1.6bn taking the likely total bill to firms to £9.1bn.
Without such a scheme, the cost to lenders of dealing with complaints through the Ombudsman or courts is estimated to be over £6bn higher.
How the scheme will work
Motor finance loans taken out between 6th April 2007 to 1st November 2024 are covered.
There will be a short implementation period so firms can prepare. This will be up to 30th June 2026 for loans taken out from April 2014 and 31st August 2026 for those agreed earlier.
Lenders will have three months from the end of the implementation period to inform complainants whether they’re owed compensation and how much. This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner.
Lenders will only contact people who haven’t complained if they are likely to be owed money and have six months from the end of the relevant implementation period to do so.
For most people compensation will be made up of two parts, the average of the commission paid and the estimated loss, based on a percentage discount of the interest (APR) they paid – 17% for cases from April 2014 and 21% for earlier agreements, to reflect greater loss then.
Interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year.
Claims for high value loans - amounts higher than 99.5% of other loans that year - are not covered by the scheme, which is designed for the mass market. These consumers can still complain to firms and the Financial Ombudsman Service.
The FCA has established a dedicated supervisory team to monitor if firms are meeting the scheme's rules and act if they’re not. If people disagree with their firm's decision, the Financial Ombudsman will be able to assess whether the scheme rules have been followed.
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.”
