Millions of people could receive compensation payments averaging £700 each from next year under a new scheme for unfair motor finance deals. The Financial Conduct Authority (FCA) estimates around 14 million agreements will be eligible for redress.
The compensation scheme could cost lenders £8.2 billion based on 85% of eligible consumers taking part. This figure could rise to £9.7 billion if all eligible customers claim compensation, though the FCA considers this unlikely.
How the mis-selling happened
Motor finance firms broke the law by failing to properly inform customers about commission payments to car dealers. This meant many drivers paid higher interest rates without knowing dealers were incentivised to increase costs for bigger commissions.
The scheme covers agreements made between April 2007 and November 2024, focusing on discretionary commission arrangements where brokers could inflate interest rates. Around 44% of the 32 million agreements examined during this period are considered unfair.
Major lenders already preparing
Several major lenders have already set aside significant funds in preparation. According to the Daily Mail, Lloyds has reserved £1.15 billion, Santander £295 million, and Close Brothers £165 million for potential payouts.
Chancellor Rachel Reeves has been involved in ensuring the scheme doesn't disrupt the vehicle financing industry while delivering fair compensation to consumers.
Simple claiming process
FCA chief executive Nikhil Rathi 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."
Lenders will have three months to contact customers who have already complained and six months to reach those who haven't. Consumers who aren't contacted will have one year to make a claim directly.
Avoid unnecessary fees
The Birmingham Mail reports that Martin Lewis describes this as the "simplest form of redress scheme we've seen" compared to the PPI scandal. The FCA strongly advises consumers they don't need claims management companies to access compensation.
According to the Daily Record, claims management companies typically charge 30% commission for a service that's completely free when done directly. The FCA warns consumers could face unnecessary fees if they use such firms.
Sources used: "Daily Mail", "Birmingham Mail", "Daily Record" Note: This article has been edited with the help of Artificial Intelligence.
