UK car finance scandal: How Scottish drivers can claim £700 compensation pay out for unfair car loans

The Financial Conduct Authority (FCA) said compensation pay outs on around 14 million unfair motor finance deals could start next year.

The scheme will cover motor finance agreements taken out between April 2007 and November 2024, where commission was paid from the lender to the broker.

The regular estimated its redress scheme could cost lenders £8.2 billion in compensation, based on about 85% of eligible consumers taking part.

The FCA had previously estimated lenders could foot a bill totalling between £9 billion and £18 billion.

It also said before that drivers could receive less than £950 in compensation per motor finance deal, but it has now confirmed pay outs are likely to average at about £700.

What is the car finance scandal?

The vast majority of new and second-hand cars are bought with finance agreements, with customers paying an initial deposit, followed by monthly instalments with interest.

About two million are sold this way each year.

Before January 2021, some car finance lenders had what were known as discretionary commission arrangements (DCAs) with brokers.

Under these agreements, brokers and car dealers could increase the interest rate on a finance deal to earn more commission.

This arrangement was often not made clear to consumers.

In 2021, the FCA banned deals in which the dealer received a commission from the lender.

The FCA said they created an incentive for customers to be charged more interest than necessary.

It estimates 99% of car finance deals had a commission model, and around 56% had DCAs.

The FCA outlawed DCAs in January 2021, but many people complained that they were overcharged before the ban was in force.

Since January 2024, the regulator has been considering whether compensation should be paid to people with these deals since 2007.

Announcing the scheme, 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.

“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated.

“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.”

It believes setting up a free compensation scheme will make it easier for customers to access, and more cost-effective for firms by removing many of the legal and administrative work.

The proposals come after a Supreme Court ruled in August that lenders were not liable for hidden commission payments on car finance agreements.

How do I claim?

The FCA said the scheme would cover motor finance agreements taken out between April 6 2007 and November 1 2024 “where commission was payable by the lender to the broker”.

People who do not feel they were told key details about their motor finance arrangement, like commission payments, should complain to their lender now if they haven’t done so already.

The FCA said once the proposed scheme goes live, lenders will contact those who have already complained.

If they don’t hear back after one month, lenders will assume they should review the case.

Those who have already complained before the scheme is live are likely to receive compensation faster.

People who haven’t complained will be contacted by their lender within six months of the scheme starting.

People will be asked if they want to opt-in to the scheme to have their case reviewed. They’ll have six months to decide.

People who don’t receive a letter if, for example, lenders no longer have their details, will have a year from the scheme starting to make a claim. They will be able to do that by making a claim to their lender directly.

Meanwhile, if consumers don’t know who their lender was at the time, they can check on the FCA website.

The watchdog has repeatedly warned consumers that they do not need to use a claims management company (CMC) or a law firm to access its compensation scheme, and they could be subject to unnecessary fees if they do.

Who can complain?

The FCA says that people will only receive compensation under the scheme if they weren’t told details of at least one of three arrangements between the lender and the broker which are found in some motor finance agreements.

These are:

• A discretionary commission arrangement, which allowed the broker to adjust the interest rate the customer would pay for a higher commission
• A high commission arrangement (35% of the total cost of credit and 10% of the loan).
• A contractual arrangement or tie between the lender and broker, which provided exclusive or near exclusive rights to lenders to provide credit.