UK car finance redress plan targets mis-sold deals

UK regulators have unveiled a compensation framework aimed at addressing mis-selling in car finance, covering about 12 million agreements made between April 2007 and November 2024.

Officials said the redress is intended to repay consumers in cases where car dealers received commissions from lenders that were not disclosed. They said this commission structure could incentivise higher interest rates for borrowers.

Scope, payouts, and estimated industry cost

Under the programme announced by the Financial Conduct Authority (FCA), the average compensation is expected to be £829 for each mis-sold agreement.

Officials estimated the total cost to the industry at £9.1 billion, including administrative expenses, and said lenders are expected to fund the payments.

The FCA said the scheme also applies to contracts where dealer commissions were deemed excessively high. This includes cases where commissions exceeded 35% of the credit cost or 10% of the loan.

Link to earlier restrictions on commission practices

Officials tied the compensation plan to sales practices the regulator has already acted to curb. The FCA banned discretionary commission arrangements (DCAs) in 2021 after concerns that such arrangements could reward dealers for directing customers toward higher-rate borrowing.

The new process is designed to deal with the legacy effects of those practices across the period specified by the regulator.

What consumers are expected to do

The FCA said next steps depend on whether a consumer has already filed a complaint. People who previously complained about a mis-sold agreement do not need to take further action under the scheme.

Others are advised to contact their car loan providers directly to pursue a claim using the process set out by the regulator.

Outreach deadlines and timing risks

Officials also set out a timetable for lender outreach. Lenders are expected to contact affected customers by the end of 2024 for agreements made after 2014.

For older agreements, lenders are expected to reach out by February 2027, reflecting a longer lookback period for earlier cases.

The FCA’s plan comes as lenders, including major banks, have already set aside billions in provisions for potential payouts, anticipating the scale of the redress.

Officials said the industry has largely accepted the FCA’s framework, but a legal challenge by a consumer group arguing the redress is insufficient could delay payments. Officials said the timing and pace of compensation therefore remain subject to that potential court process.