Car Finance Compensation Delayed Until 2027 Amid Legal Challenges

Millions of drivers who were mis-sold car finance agreements must wait until at least 2027 to receive compensation, regulators have announced.

Average payments of about £829 are expected under the rules published by the Financial Conduct Authority (FCA).

However, legal challenges to the scheme mean compensation calculations and payments have been delayed.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements. Customers pay an initial deposit to secure the vehicle, then a monthly fee with interest.

Compensation could be given to many of those who took out a car loan between April 2007 and November 2024.

The decision by the FCA, the financial regulator, applies to about 12 million car loans - just over 40% of the total number during the period.

In 2021, the FCA banned deals where car dealers received commission from lenders, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs) and customers were often not told about them.

The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

Other car buyers were also judged to have signed unfair contracts because the commission paid to the dealer was so high - accounting for at least 35% of the total cost of credit and 10% of the loan.

Some customers were not given accurate information about the best finance deal because of exclusive arrangements between car dealers and lenders.

Complaints have already been made about four million finance agreements. Those people do not need to do anything.

The regulator urged anyone who has not yet complained to contact their car loan provider directly, rather than using a third-party claims management company.

The regulator's central compensation scheme allows people to complain and potentially receive compensation for mis-sold deals without the need for a lawyer or to go through the courts.

Motorists have also been warned to be on the alert for scammers posing as car finance lenders offering fake compensation.

The FCA has published this guidance on how to complain.

Under its plans:

lenders will respond to claims, explaining if you are owed compensation and how much – but timing of those letters is now uncertain owing to the legal challenge

those who complain before the scheme gets up and running are likely to receive compensation faster

people who complained by 30 June and are not owed compensation should be told by 18 November, those who complained by 31 August will be told if they are not owed compensation by 18 January 2027

those who have not complained will be contacted by their lender. People will be asked if they want to opt in to the scheme to have their case reviewed

those motor finance borrowers who do not receive a letter - for example because lenders no longer have their details and cannot trace them - can still make a claim

Regulators have warned claims management companies and law firms involved in motor finance commission claims to make sure consumers do not have multiple representatives for the same claim and are not charged excessive termination fees.

FCA boss Nikhil Rathi told the BBC's Today programme there are "many law firms out there who would like to get 30% of any compensation", stressing that the regulator's scheme was "free to use" for consumers.

Millions of drivers were in line to receive compensation this year, and most of the remainder should have got compensation by the end of 2027.

But the FCA has confirmed that no compensation will be paid before 2027 as a result of legal challenges to the scheme.

Consumer Voice said the scheme left "too many people short-changed". The FCA has also received challenges from three lenders: Volkswagen Financial Services, Mercedes Benz Financial Services, and Credit Agricole Auto Finance.

The UK's Upper Tribunal has agreed to hear legal challenges to the scheme, either in December or February next year.

It means that lenders will no longer need to calculate or pay compensation to people owed money under its scheme, until the legal process concludes.

The FCA said it would need to decide what to do next if the courts decided to overturn the programme. Without a scheme in place, the FCA has estimated that up to 19 million complaints would need to be handled individually, taking three years and costing lenders £6bn more.

It said it would "defend the scheme robustly as lawful and the best way to resolve such a widespread, long running and complex issue".

Ultimately, the industry is expected to cover the full costs of any compensation scheme, including any administrative costs.

Lenders - including some of the UK's biggest banks and specialist motor finance firms - have already set aside billions of pounds for potential payouts.

The body that represents the lending industry, the Finance and Leasing Association, said it had "concerns" about the programme but that it was choosing not to raise a legal challenge.

Santander, Barclays and Lloyds also accepted the scheme, despite raising concerns that the level of redress is disproportionate to those who suffered harm.

Even if drivers are entitled to compensation from these lenders they will need to wait.

There were some concessions made to lenders in a scaled-down final compensation plan from the FCA.

The Supreme Court considered three test cases which influenced the FCA's decision and, ultimately, limited how broad the compensation programme could have been.

It focused on whether the car dealers had a duty to act on behalf of their customers, rather than in their own interests. The test case which was upheld was that of Marcus Johnson, who bought his first car - a Suzuki Swift - in 2017.

In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he appeared to have been misled over the relationship between the finance firm and the dealer.