Britain’s motor finance industry is on the hook for £8.2 billion to £9.7bn ($11bn-$13bn) to compensate consumers for unfair car loans, the regulator said yesterday, in plans that point to a lower bill than the sector had feared.
The new estimates, outlined by the Financial Conduct Authority (FCA) in a six-week consultation released after the market close, further cut forecasts of the hit to banks such as Lloyds Banking Group, Close Brothers and Barclays.
“Many motor finance lenders did not comply with the law or the rules,” said FCA chief executive officer Nikhil Rathi. “Now we have legal clarity (after court rulings), it’s time their customers get fair compensation.”
The estimates are based on either 85 per cent or a “very unlikely” 100pc of eligible consumers, who signed 14.2 million unfair motor loans between 2007 and 2024 – 44pc of all agreements made in the period – taking part in the planned redress scheme.
The FCA said consumers in Britain who fell victim to motor finance mis-selling could be eligible for around £700 in compensation on average. Payouts could start next year.
But at an evening news conference, Rathi stressed the numbers were estimates and susceptible to change.
Many of the car loans, which were packaged up by car dealers, stem from discretionary commission agreements (DCAs), in which lenders allowed car dealerships to earn higher fees by ramping up the interest rates consumers paid on the loans.
The FCA banned DCAs in 2021.
But consumers will also be eligible for compensation if there was a very high commission arrangement or there was an exclusive, contractual arrangement between the lender and the car dealer.
The regulator had previously estimated that a compensation scheme would cost between £9bn and £18bn and that most individuals could receive less than £950 in compensation.
That estimated bill had already calmed the industry’s worst fears that the costs of the saga could rival that of Britain’s payment protection insurance mis-selling scandal, which cost lenders more than £40bn between 2011 and 2019.
Even with the lowered total bill, the scandal will still be one of the costliest for British banks.
Lenders, which also include the UK arms of Santander and Bank of Ireland and the lending arms of big carmakers, have set aside more than £2bn between them to cover potential compensation claims.
Rathi said that not everyone would get what they wanted following the ruling, as the regulator will work on the compensation scheme.
“We recognise that there will be a wide range of views on the scheme, its scope, time frame and how compensation is calculated,” he said. “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.”
The FCA found that car buyers “may have been charged too much” by their lenders, meaning that anyone who bought their car before January 2021 using a car finance scheme could be eligible for compensation.
Some companies used ‘discretionary commission arrangements’ with brokers, which gave them the power to adjust customers’ interest rates on Personal Contract Purchase (PCP) and Hire Purchase agreements.
The watchdog, which looked into data from across some 32 million agreements made between 2007 and 2024, believes setting up a free compensation scheme will be easier and quicker for customers to access, and more cost-effective for firms by removing much of the legal and administrative work.
Because these brokers earned more commission on higher rates, this created an incentive to maximise the rate given. An estimated 40pc of car finance deals were thought to be affected by the issue.
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