Car finance compensation update as millions could get cash in 2026 under new rules (Image: Getty)
Millions of people mis-sold car finance could be eligible for compensation this year under plans to set out final rules for a redress scheme later this month, the City watchdog has said.
The Financial Conduct Authority (FCA) said it is likely to make several changes to the proposed compensation scheme following more than 1,000 responses to its consultation on the proposals, which also arrives amid a backlash in the lending sector. However, it said a final decision has not yet been made on whether the scheme should go ahead. If it gets the green light, it expects to give lenders a three-month implementation window to pay out redress, with up to five months for older motor finance arrangements owing to the “scale and complexity of the scheme and in response to feedback”.
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The FCA said it is likely to make several changes to the proposed compensation scheme (Image: Getty)
Consumers would be told within three months of the implementation period’s conclusion whether they are entitled to compensation and the amount, but could then accept straightaway without waiting for a final determination, according to the FCA.
The regulator also intends to simplify the process by no longer asking those who complain before the scheme starts whether they wish to opt out, and will not require lenders to contact customers by recorded delivery, allowing them to reach out using other methods.
The FCA said: “If we proceed with a scheme, we are likely to make several changes.
“If we do go ahead, we expect to publish final rules in late March. The timing of publication will be outside market hours and we will confirm the date in advance.
“Even with an implementation period, streamlining the process means millions of people would receive compensation in 2026,” it added.
The FCA has been consulting on plans since outlining a proposed compensation scheme last October that could result in payouts for some 14 million unfair motor finance agreements, averaging approximately £700 each.
It calculated its redress scheme could cost lenders around £11billion once implementation expenses and administrative work are factored in.
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Motor finance companies and lenders breached the law and FCA regulations by failing to properly inform customers about commission payments from lenders to the car dealers who sold them the loan, the regulator previously said.
This meant numerous motorists were denied the chance to negotiate or secure a better deal and consequently may have paid a higher interest rate for their loan.
However, the regulator’s proposals have faced considerable pushback from lenders, with institutions such as Santander and Lloyds Banking Group setting aside substantial sums to cover the anticipated cost.
Santander UK’s previous boss Mike Regnier last year urged the Government to intervene, cautioning the compensation scheme proposals could affect the car finance market and broader motor sector, resulting in redundancies.
The FCA said the likely changes under consideration for the scheme would deliver a “better experience for consumers” and “help keep the cost of delivering the scheme proportionate, supporting a well-functioning market for the millions of people that rely on it”.
The regulator is urging individuals who suspect they may have been mis-sold car finance arrangements with concealed commission to lodge complaints immediately with their lender, before the scheme commences.
It said: “Doing so means they should get any compensation sooner.
“There is no need to use a claims management company (CMC) or law firm, and those who do may lose over 30% of any compensation.”
Richard Pinch, senior director of risk at banking and credit advisory firm Broadstone, described the FCA’s suggested implementation timeframe as a “sensible acknowledgement” of the magnitude and complexity of the scheme.
“Firms will need time to review historic agreements, build out operational processes and ensure payments are calculated accurately, particularly where older agreements are involved, to maintain consumer confidence,” he said.