UK banks could soon be required to proactively inform customers that they were mis-sold car finance, as the Financial Conduct Authority (FCA) moves closer to implementing a multi-billion-pound compensation scheme.
On Tuesday, the FCA announced that it would make a final decision on the scheme within six weeks of a landmark Supreme Court hearing scheduled for early April.
If approved, this redress programme could benefit millions of Britons who unknowingly overpaid on car finance deals.
The mis-selling scandal, which has been escalating for over a year, is expected to cost major lenders—including Santander UK, Close Brothers, Barclays, and Lloyds—up to £44 billion, according to industry analysts.
At the heart of the issue is the discretionary commission arrangements (DCAs) on car loans issued between 2007 and 2021. These deals allowed car dealerships and brokers to set their own interest rates, earning higher commissions at the expense of borrowers.
In October 2023, the Court of Appeal ruled that paying a “secret commission” to car dealers—without disclosing the amount or terms to customers—was unlawful. This significantly broadened the scope of the scandal and raised compensation estimates.
If the FCA scheme is approved, lenders will have to directly contact affected customers and offer compensation, eliminating the need for individuals to submit claims. This could reduce reliance on claims management firms, ensuring that customers receive the full payout they are entitled to.
Financial expert Martin Lewis estimates that compensation could average around £1,140 per borrower. For example, on a £10,000 four-year car loan, a customer could have overpaid £1,100 in interest, with additional interest potentially being added to the payout.
Two lenders, Close Brothers and FirstRand, are challenging the October ruling in the Supreme Court hearing from 1 to 3 April. The FCA has been granted permission to intervene in the case and has submitted confidential evidence to the court.
If the FCA determines that there were widespread failings across the motor finance industry, it is likely to push forward with an industry-wide compensation scheme. Under such a plan, banks would be required to assess whether customers were mis-sold loans and offer appropriate compensation accordingly.
With a decision expected by mid-2024, the scandal could become one of the UK’s biggest financial redress schemes in recent history, impacting millions of car finance customers.
