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The Financial Conduct Authority (FCA) is set to reveal its final rules today on a compensation scheme aimed at millions of drivers affected by mis-sold car finance agreements. This long-awaited payout program will cover approximately 14 million motor finance contracts, offering an average compensation payment of around £700 for deals made between April 2007 and November 2024. The announcement follows a multi-year legal and regulatory process, including a significant ruling by the UK’s Supreme Court.
This scheme addresses issues such as commission arrangements between lenders and car dealers, unfair contract terms, and inaccurate information provided to buyers. The FCA has developed a central system to allow affected customers to claim compensation without having to take their cases to court, although some individuals might still opt for legal proceedings in pursuit of potentially larger awards. The regulator had previously estimated that 44% of motor finance agreements during this period could qualify for compensation, with payments expected to exceed £8 billion, alongside around £3 billion in administrative costs borne by lenders.
The Supreme Court’s ruling last August narrowed the scope of eligible claims, which helped keep the overall payout costs more manageable. Most cars, including many second-hand vehicles, are typically purchased through finance agreements. In 2021, the FCA banned discretionary commission arrangements (DCAs) where dealers received commission based on the interest rate charged to customers—a practice that encouraged lenders to impose unnecessarily high rates. Other sales identified by the FCA as unfair include high commission deals with commissions equal to or exceeding 35% of the total credit cost and 10% of the loan, as well as tied arrangements granting lenders exclusivity without clear disclosure to customers.
Despite the regulator’s intentions, representatives of lenders have criticized the FCA’s findings as overly broad and argued that compensation could be excessive. The Finance and Leasing Association (FLA) cautioned that “redress being paid to millions of customers who experienced no unfair relationship, or no loss, diverting resources away from those for whom redress is genuinely due.” Major financial institutions, such as Lloyds, have already set aside billions to cover compensation liabilities, while Close Brothers has even reduced its workforce due to its involvement with the scheme. The compensation arrangement has been a long time coming, with some agreements nearing two decades old, and further legal challenges by lenders or claims management companies could delay payouts even more
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