Over the past two decades, car finance has become the most common way for Britons to purchase vehicles. From glossy dealership showrooms to online car brokers, finance agreements such as Hire Purchase (HP) and Personal Contract Purchase (PCP) made car ownership accessible for millions.
Yet behind the convenience lay a widespread practice of unfair lending and hidden commissions that cost consumers dearly.
Now, after a series of legal rulings and public pressure, the Financial Conduct Authority (FCA) has proposed an ambitious car finance compensation scheme.
It aims to compensate millions of drivers misled by complex commission arrangements, inaccurate information, and unfair contracts. The FCA estimates that more than 14 million motor finance agreements between April 2007 and November 2024 could fall within the scope of this redress programme.
While the scheme has been welcomed by consumer groups as a long-awaited step toward justice, the average payout is expected to be around £700 per agreement, lower than earlier estimates of £950. Even so, the total compensation bill could reach £8.2 billion, marking one of the largest financial restitution efforts in modern British history.
What Is the FCA Car Finance Compensation Scheme and Why Has It Been Introduced?
The FCA car finance compensation scheme is a regulatory redress programme designed to address the mis-selling of car finance agreements across the UK. It follows years of investigations revealing that many borrowers were charged excessive interest rates due to discretionary commission arrangements (DCAs).
Under these schemes, lenders allowed car dealers or brokers to adjust the interest rate on finance deals. The higher the rate, the more commission the dealer earned. This meant thousands of consumers unknowingly paid more for their car loans simply because their dealer had the power to inflate rates for personal gain.
These practices, which were common from the mid-2000s until they were banned in 2021, breached the FCA’s principles of transparency and fairness. The new compensation scheme seeks to correct these injustices by offering financial redress to those affected.
According to Nikhil Rathi, Chief Executive of the FCA, “it’s time customers get fair compensation.” He acknowledged that the scheme may not please everyone but insisted that it represents a “fair way forward” after complex legal debates and years of investigation.
How Did Car Finance Mis-Selling Happen in the UK?
For many years, the car finance market operated with limited oversight of how brokers and dealers structured deals. While car buyers believed they were being offered the best available rate, behind the scenes, commission-linked incentives were shaping the outcome of many agreements.
For instance, a customer might have qualified for a 5% interest rate based on their credit score, yet the broker could raise it to 8% or 9% to increase their commission payout. This practice, called a discretionary commission model, was entirely legal until 2021 but inherently unfair.
In some cases, the commission itself accounted for over a third of the total cost of credit, leaving buyers paying thousands of pounds more over the term of their loan. Furthermore, many customers were never told that the broker was being paid a commission at all, a clear breach of transparency expectations under consumer protection law.
Other issues identified by the FCA include:
- Exclusive lending arrangements, where dealers partnered with a single lender, misleading buyers about the competitiveness of the offer.
- Misleading information, where brokers failed to explain the real cost of the finance deal.
- Unfair contract structures, in which high commissions and complex repayment terms placed consumers at a disadvantage.
By 2021, public concern and mounting complaints forced the FCA to act, leading to a full investigation and eventual design of a redress scheme.
Who Is Eligible for the FCA Car Finance Compensation Scheme?
The FCA’s analysis shows that 44% of all motor finance agreements made since 2007 could be eligible for compensation. Eligibility depends on several criteria, including the type of finance product, the involvement of commissions, and the period in which the deal was arranged.
Consumers may qualify if:
- Their finance agreement was made between April 2007 and November 2024.
- They took out a Hire Purchase (HP) or Personal Contract Purchase (PCP) deal.
- Their agreement included a discretionary commission arrangement or other unfair contractual terms.
- The lender was authorised and regulated by the FCA.
Even if a car finance loan has already been repaid or the vehicle has been sold, consumers can still make a claim if they meet these conditions.
The FCA has also made it clear that consumers do not need to use a solicitor or claims management company to apply. Claims can be submitted directly to lenders at no cost.
How Will the FCA Car Finance Compensation Scheme Operate in Practice?
The regulator has outlined a clear process for how the scheme will function once approved. Its approach is intended to ensure fairness, accessibility, and efficiency, while avoiding the delays and confusion that characterised earlier financial redress programmes such as Payment Protection Insurance (PPI).
The table below summarises how the scheme will be implemented:
| Consumer Category | FCA Instruction | Expected Timeline |
| Consumers who already complained | Lenders must contact them. If no response within one month, cases will be reviewed automatically. | Within one month of scheme launch |
| Consumers with pending complaints | Existing cases paused pending scheme approval will be prioritised. | Early 2025 |
| Consumers who have not complained | Lenders will identify and contact eligible customers, inviting them to opt into the scheme. | Within six months of launch |
| Untraceable customers | Consumers who have moved or changed details can file independently within a set period. | Within twelve months of scheme start |
| Consumers preferring court action | They can choose to pursue separate legal claims instead of using the FCA scheme. | Ongoing option |
The FCA expects to have the scheme operational by early 2025, with payments starting soon after.
The compensation will be free for consumers to access, and the FCA emphasises that redress interest will be lower than that awarded in PPI cases, as the underlying financial products differ in nature and scale.
How Much Compensation Could Drivers Receive?
Although earlier reports speculated that average compensation might reach £950 per deal, the FCA now estimates the typical payout to be around £700.
The reduction reflects differences in lending practices and the varying degrees of overpayment among affected consumers. While some individuals may receive more than this amount, others will receive less, depending on how much extra interest they paid and the length of their finance agreement.
The FCA anticipates the total value of payouts to reach £8.2 billion, covering both new and historic complaints. This sum positions the car finance scheme among the most significant compensation programmes since the PPI scandal.
Consumer campaigners, including David Bott of Bott and Co, have expressed concern that the average compensation “raises serious questions” about whether the redress fully reflects the financial harm caused. Nevertheless, the FCA insists that the scheme’s calculation method is based on verified data, ensuring a consistent and legally defensible approach.
What Role Did Legal Rulings Play in Shaping the Scheme?
A pivotal factor behind the FCA’s decision was the Supreme Court ruling in the case of Marcus Johnson v. Black Horse Finance, which confirmed that consumers could challenge mis-sold finance agreements even years after purchase.
However, while the decision clarified key legal principles, it also set boundaries around the types of cases eligible for redress. In effect, the ruling limited the scheme’s scope, focusing on clear instances of discretionary commission rather than every form of high-cost lending.
This balance was necessary, according to Nikhil Rathi, to ensure fairness for both consumers and lenders. He described the outcome as “a fair way forward” that respects prior judicial findings and avoids an overly broad compensation process.
What Has Been the Reaction from Lenders and Consumer Groups?
The reaction to the proposed scheme has been mixed.
Industry representatives, such as Adrian Dally from the Finance and Leasing Association, have criticised the FCA’s estimates, arguing that the regulator “is overcompensating.” Dally suggested that the reported scale of losses “seems implausibly high,” although he conceded that “some customers did not necessarily get the best deal.”
Consumer advocates, however, strongly support the FCA’s action. Alex Neill, co-founder of Consumer Voice, described the initiative as “a pivotal moment for the regulator” and “long overdue.” Martin Lewis, founder of MoneySavingExpert, urged lenders not to resist the scheme, saying, “If they want clarity, then don’t fight this. Let’s all move on.”
The FCA, in response to criticism, has emphasised that its proposals are grounded in extensive data collection and informed by both High Court and Supreme Court precedents.
What Are Examples of Mis-Selling That Led to This Investigation?
The FCA’s investigation uncovered numerous examples of mis-selling and unfair behaviour. Consider the following scenarios:
A driver purchases a £20,000 vehicle using a PCP agreement. The dealership, acting as a broker, raises the interest rate from 5% to 9% without disclosing this to the customer. The higher rate earns the dealer a £1,500 commission. Over the term of the loan, the customer ends up paying nearly £3,000 more in interest than necessary.
In another case, a buyer agrees to a hire purchase contract with a 10% deposit and a 48-month term. The dealer receives 40% of the total interest as commission information the customer never receives. Such undisclosed commissions were widespread and are now at the heart of the compensation effort.
In a third example, a customer was led to believe that the dealer had compared multiple lenders to find the best deal. In reality, the dealer had an exclusive arrangement with a single finance company, preventing genuine competition.
These examples illustrate how consumers were systematically disadvantaged, often without any clear indication that they were overpaying.
How Does the FCA Scheme Differ from the PPI Redress Programme?
While parallels with the Payment Protection Insurance (PPI) scandal are often drawn, the FCA stresses that the car finance scheme operates on different principles.
PPI involved a single financial product sold alongside loans and mortgages, whereas the car finance issue concerns the interest structure and commission practices embedded within the loan itself. As a result, payouts are smaller, averaging £700 per agreement, compared to £2,000–£3,000 under PPI.
Moreover, the FCA has taken steps to ensure that the car finance process is simpler and faster. The regulator is actively working to prevent opportunistic claims management firms from exploiting consumers, having already removed over 700 misleading adverts that targeted potential claimants.
What Impact Will the Scheme Have on the UK Car Finance Market?
The repercussions for the UK’s motor finance industry will be far-reaching. Lenders face not only substantial financial liabilities but also an obligation to reform their business models. The FCA’s actions have effectively drawn a line under opaque commission structures and signalled a new era of transparency in car finance.
Dealers and brokers will now be required to disclose all commission arrangements clearly and ensure that customers receive impartial advice on finance products. In the long term, the market is expected to become more competitive, with lenders prioritising trust and compliance over aggressive sales tactics.
Financial analysts predict that the scheme could also influence broader lending practices across other consumer credit sectors, reinforcing the FCA’s authority as the UK’s leading financial regulator.
What Should Consumers Do Next?
Consumers who suspect they were affected should begin by reviewing any available car finance paperwork and identifying which lender or dealer arranged their loan. They should then contact the lender directly to check whether their agreement falls within the FCA’s review period.
Those who have previously made complaints will be contacted automatically by lenders once the scheme launches. Consumers who have moved house or changed contact details should ensure their lender has up-to-date information.
Importantly, borrowers do not need to hire claims management firms or legal representatives. The process is designed to be free and straightforward, with lenders bearing the administrative responsibility.
Conclusion
The FCA car finance compensation scheme represents one of the most significant regulatory interventions in recent memory. It reflects a commitment to consumer fairness and transparency, correcting years of mis-selling that quietly inflated costs for millions of car buyers across the UK.
Although the average payout per agreement may seem modest, the scheme’s total value estimated at over £8 billion, underscores the scale of the wrongdoing uncovered. More importantly, it marks a decisive step toward restoring public confidence in the car finance industry.
As the scheme moves toward launch in 2025, both consumers and lenders face a period of adjustment. For many drivers, however, this may finally bring closure to a long chapter of financial unfairness.
FAQs About the FCA Car Finance Compensation Scheme
What is the timeframe covered by the FCA car finance investigation?
The investigation covers finance agreements made between April 2007 and November 2024, encompassing millions of HP and PCP deals.
How much compensation will consumers receive on average?
The average payment is expected to be around £700 per agreement, although individual cases may vary.
Do consumers need to use a lawyer or claims management company?
No. The FCA advises applying directly through lenders without external assistance or fees.
Can consumers still make claims if they’ve settled their finance?
Yes. Eligibility is based on when the agreement was made, not whether it remains active.
What if a consumer doesn’t receive communication from their lender?
Consumers who don’t hear from their lender within 12 months of the scheme’s start can independently submit a claim.
Can consumers opt out of the FCA scheme and take legal action instead?
Yes. Participation is voluntary, and individuals may still pursue separate court cases if they wish.
When will the first payments be made?
The FCA expects to launch the scheme in early 2025, with initial payments following soon after.
