Car finance compensation campaign launched as payouts could reach £18bn

The City regulator is launching a £1m campaign to raise awareness over motor finance compensation, after warning that payouts relating to the scandal could reach £18bn.

The Financial Conduct Authority (FCA) announced on Friday that it was launching the campaign to let motor finance customers know they don’t need to use a claims management company (CMC) or law firm to access an industry-wide compensation scheme the regulator is proposing.

As part of the campaign, which will feature radio and online advertising, the FCA said it was teaming up with influencers to get the message to consumers.

New research commissioned by the regulator found that 79% of motor finance customers are aware that they may be owed compensation and 61% were aware of possible compensation scheme. However, 41% of those aware they may be eligible for a payout didn’t know they would not need to use a claims management company or law firm if a redress scheme is introduced.

The FCA pointed out that using a CMC or law firm to make a motor finance claim could cost consumers around 30% of any compensation paid.

This comes after the FCA said in early August that it will consult on a compensation scheme for motorists caught up in the UK car finance scandal.

In a statement, the City regulator said its review of the past use of motor finance "has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers".

The move follows a crucial Supreme Court ruling, in which the court largely sided with lenders, allowing them to avoid paying out as much as £44bn in compensation.

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Instead, the FCA said the collective compensation pot could be much smaller, ranging between £9bn and £18bn.

The long-running saga has weighed heavily on the stocks of the most exposed players, including Lloyds (LLOY.L), which previously said it had put a further £700m aside for motor finance commission remediation costs.

Another impacted lender is Close Brothers (CBG.L), which had previously said it would set aside up to £165m in the first half of its financial year for motor commission costs.

Here's more detail on what you need to know about the scandal.

How did the car finance 'scandal' begin?

The City watchdog, the FCA, started looking into commissions in the motor finance industry in 2017.

The FCA then launched a consultation on the use of discretionary commission arrangements (DCAs) in 2019. DCAs were a type of commission model received by some car retailers and motor finance brokers, which was linked to the interest rate that customers pay.

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This meant that the broker could effectively set the interest rate and the FCA said this created an incentive to sell more expensive credit to some customers, acting against their interests.The City regulator is to consult on a compensation scheme for those caught up in the car financing scandal.·Burak Sür via Getty Images

As a result, the FCA banned DCAs in 2021, a move which it said would save customers £165m a year.

In January 2024, the FCA then launched a review of historical motor finance DCAs, to understand if there was any misconduct related to this type of commission before the 2021 ban. In addition, the review has also sought to understand if consumers have lost out and if so, what the best way would be to ensure they receive appropriate compensation.

However, a Court of Appeal ruling in October broadened the scope of the issue to any car finance commissions. The court found it illegal for dealerships to receive commissions on car finance deals without securing “fully informed consent” from buyers. It is feared that the landmark ruling has paved the way for a multibillion-pound redress scheme.

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In December, the Supreme Court granted Close Brothers (CBG.L) and South African financial services firm FirstRand (FSR.JO) permission to appeal the October ruling.

The Financial Times reported in January that the Treasury had submitted an application to intervene in the case, saying in a letter that it had the "potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers."

However, the Supreme Court said it had refused the Treasury's application to intervene.

Then came the ruling in early August, which has helped clarify some issues related to the scandal, but also raised more questions.

What next?

The FCA will propose rules on how lenders should fairly and efficiently decide whether someone is owed compensation and how much.

The regulator has estimated that most individuals would probably receive less than £950 in compensation per agreement, but the final design of the scheme has yet to be completed.

The consultation will launch by early October and, upon agreement of the compensation scheme, the first payments should be made in 2026.

The FCA urged consumers who were concerned that they were not told about commission and may have paid too much for their motor finance to complain immediately to their lender or broker.

Full details of the information consumers need to provide can be found on the FCA's website. People who have previously complained don’t need to take any action.

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