AVERAGE £830 PAYOUT: FCA finalises motor finance redress scheme with £7.5bn expected in payouts
- Perry Richardson
- 2 hours ago
- 4 min read
Millions of motor finance customers are set to receive compensation under a Financial Conduct Authority (FCA) redress scheme aimed at borrowers who were treated unfairly because lenders or brokers failed to disclose key commission arrangements on car loans. The regulator said 12.1 million agreements made between 6 April 2007 and 1 November 2024 are now eligible, and estimated that if 75% of consumers claim, total redress would reach £7.5 billion.
The FCA said it had tightened the rules after receiving conflicting feedback from consumers, firms, manufacturers and trade bodies. That has reduced the number of agreements in scope compared with its earlier consultation, but increased the average expected payout to around £830 per agreement. The regulator also introduced a minimum compensatory interest rate of 3% a year and said payments will be capped in about one in three cases so borrowers are not put in a better financial position than if they had been treated fairly in the first place.
Under the scheme, consumers will be compensated where they were not clearly told that a dealer or broker had set the interest rate to earn more commission through a discretionary commission arrangement, where commission was especially high, or where a broker was effectively tied to one lender or gave one lender first refusal. The FCA said some cases will fall outside the scheme, including agreements involving minimal commission, zero-interest borrowing and certain tied arrangements where visible links between a manufacturer and franchised dealer were already evident.
The timetable is split into two parts. Firms have until 30 June 2026 to prepare for agreements taken out from 1 April 2014, and until 31 August 2026 for earlier agreements. Lenders will then have three months from those deadlines to tell complainants whether compensation is due and how much they will receive. Customers who have not already complained will only be contacted if firms believe money is owed, with that outreach due within six months of the relevant implementation deadline. Anyone not contacted can still make a claim up to 31 August 2027.
The City regulator said 12.1 million motor finance agreements could now qualify for compensation, with average payouts rising to about £830 as firms begin preparations for payments later this year.
For most borrowers, compensation will be based on two measures averaged together: the commission paid and an estimated loss calculated from a percentage reduction in the interest rate charged. The FCA said the assumed APR discount will be 17% for cases from April 2014 and 21% for earlier agreements, reflecting what it sees as greater consumer loss in older deals. In the most serious cases, where commission was very high and another factor of unfairness was present, consumers will receive the full commission paid. Interest on redress will be linked to the annual average Bank of England base rate plus 1 percentage point, subject to the 3% minimum.
The watchdog argued that an industry-wide scheme is the most efficient route for both consumers and lenders. It said that without a centralised process, the cost to firms of dealing with claims individually through the Financial Ombudsman Service or the courts would be more than £6 billion higher. That matters for banks, specialist lenders and manufacturer-backed finance arms already facing large potential liabilities from one of the UK’s biggest consumer finance scandals in recent years. Reuters reported before the final announcement that major lenders including Lloyds, Santander, Barclays and Close Brothers were among those exposed to the outcome.
The FCA also moved to address the growing market around claims handling. It said consumers do not need to use a claims management company or law firm to access compensation and warned that doing so could cost them more than 30% of any award. Alongside the Solicitors Regulation Authority, Information Commissioner’s Office and Advertising Standards Authority, it has launched a taskforce to tackle poor claims practices. The regulator said it had already removed or amended 800 misleading adverts, helped more than 28,000 consumers exit contracts free of charge and pushed three claims management companies to reduce fees, protecting more than 500,000 consumers.
For lenders and motor retailers, the scheme now provides a firmer regulatory framework, but it also opens a new operational phase. Firms must review historic agreements at scale, identify affected borrowers, calculate redress under the FCA formula and manage communications over the next 18 months. For consumers, the regulator’s message was to complain directly and do it for free, or wait to be contacted if eligible, but avoid paying third parties for access to a scheme designed to operate without them.
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.”
