Millions of British motorists could receive compensation averaging £700 each after the financial regulator announced plans to address what has been dubbed the “PPI on Wheels” scandal.
The Financial Conduct Authority revealed today that banks may be forced to pay back £8.2 billion to consumers who were sold unfair car loans between April 2007 and November 2024. Payouts are expected to begin next year under the proposed scheme.
The FCA estimates that 14.2 million motor finance agreements, representing 44 per cent of all deals made during the period, are likely to be considered unfair. Some motorists who took out multiple agreements during this time could receive several separate payouts.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
The scandal centres on secret commissions paid by lenders to car dealers as part of personal contract purchase and hire purchase agreements. In some cases, salesmen received discretionary commissions that paid them more when customers were charged higher borrowing costs.
Such discretionary commission arrangements were banned in January 2021. However, the FCA launched a review last year amid concerns that these financial arrangements had not been properly disclosed to customers at the time loans were taken out.
The regulator’s intervention follows a Supreme Court case linked to the practice earlier this year. Judges ruled that simply being unaware of commission payments was insufficient to constitute mis-selling, but added that car owners could still claim compensation if they met certain specific conditions.
To qualify for the scheme, agreements must involve inadequate disclosure of one or more problematic arrangements. These include discretionary commission structures that allowed brokers to adjust interest rates to earn higher fees, high commissions exceeding 35 per cent of the total credit cost and 10 per cent of the loan amount, or contractual ties giving lenders exclusivity or right of first refusal.
The FCA expects approximately 85 per cent of eligible consumers will participate in the scheme. However, in the extremely unlikely scenario of 100 per cent participation, firms could owe up to £9.7 billion in compensation.
Rathi acknowledged the complexity of the issue, stating: “On such a complex issue, not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
Major lenders have already begun setting aside substantial funds to cover potential compensation claims. Lloyds Banking Group has made a provision of £1.15 billion, whilst Santander UK has allocated £295 million and Close Brothers £165 million.
The scandal has also drawn the attention of Chancellor Rachel Reeves, who has been encouraging regulators to adopt more growth-friendly policies. The government is particularly keen to avoid excessive disruption to an industry that finances vehicle purchases for millions of British families annually.
How to Make a Claim
The FCA emphasises that consumers concerned they were not informed about key details of their motor finance arrangement, particularly regarding commission payments, should complain to their lender immediately if they have not already done so.
Crucially, the regulator warns that four in 10 people who have had motor finance agreements and are aware of possible compensation do not realise they can make claims without using claims management firms or law companies. Using such services could result in consumers losing a significant portion of any compensation owed.
The FCA has provided a template letter on its website that people can use to submit complaints directly to lenders without professional assistance.
Once the scheme launches, lenders will contact those who have already lodged complaints. If no response is received within one month, lenders will assume they should proceed with reviewing the case. Consumers who complained before the scheme begins are likely to receive compensation more quickly.
Those who have not yet complained will be contacted by their lender within six months of the scheme starting. People will then have six months to decide whether to opt into the scheme for case review.
Borrowers who do not receive a letter, perhaps because lenders no longer hold their contact details, will have one year from the scheme’s start date to make a claim directly to their lender. The FCA website provides information on how to identify lenders for those who cannot remember which company financed their vehicle.
The regulator plans to run an advertising campaign to raise public awareness of the compensation scheme.
Compensation will only be paid to individuals who were not informed about at least one of three specific arrangements between the lender and the broker who sold the loan, often a car dealer. These arrangements include discretionary commission structures allowing interest rate manipulation, high commissions exceeding the specified thresholds, or contractual ties providing exclusive lending rights.
In rare circumstances, lenders may be able to demonstrate that even if one or more features was undisclosed, no unfairness occurred. However, where evidence is missing about what information was disclosed to borrowers, lenders must presume they failed to provide adequate information.
Consumers retain the right to opt out of the FCA scheme and pursue court action instead, where they may receive higher or lower compensation depending on their case’s specific facts. However, the regulator warns that court outcomes are uncertain and that after accounting for legal fees, many consumers could end up with less money than they would receive through the compensation scheme. The FCA’s scheme is also expected to be significantly faster and simpler than court proceedings.
The car finance scandal represents one of the largest consumer compensation schemes since the payment protection insurance debacle, which ultimately cost banks £50 billion. The Supreme Court ruling earlier this year averted fears that compensation levels might reach similar proportions.
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Cars ^ yet more cars — photo by Geograph / Mike Quinn, licensed under CC BY-SA 2.0
