How will car finance compensation payments work?

Millions of drivers will find out on Monday how they can claim compensation for mis-sold car finance.

Average payments of about £700 are expected under the rules being published by the Financial Conduct Authority (FCA).

Who could receive car finance compensation?

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 14 million car loans - about 44% 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.

How much compensation could victims receive?

Under the latest proposals, the FCA expects average payouts of £700 per mis-sold agreement.

The total cost of the compensation could be about £8.2bn.

The exact amount individual consumers will receive will depend on the degree of harm suffered.

For some customers - especially if their contact details have changed - it could be many months before compensation is paid.

What do victims need to do to claim compensation?

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

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

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 contact those who have already complained. If they don't hear back after one month, lenders will assume they should look at the case and pay compensation if appropriate
• those who have already complained before the scheme gets up and running are likely to receive compensation faster
• those who have not complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt in to the scheme to have their case reviewed. They will have six months to decide
• those motor finance borrowers who do not receive a letter - for example because lenders no longer have their details and cannot trace them - will have a year from the scheme starting to 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.

When will drivers receive compensation and who will pay?

The FCA had wanted the compensation scheme to be up and running by early 2026, with quick payments after that.

However, delays and extended consultation following pressure from lenders pushed back the date.

A further concession has allowed for an implementation period of three to five months before lenders need to contact customers who may be eligible.

Compensation could be delayed further if legal challenges are mounted by lenders. They have 28 days to present a legal challenge to a tribunal, which could then go to a higher court for a decision, before any payouts were made.

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.

However, the director of the body that represents the lending industry said it thought the FCA was "overcompensating".

"We don't recognise losses on that scale," said Adrian Dally from the Finance and Leasing Association, adding that the number of people the regulator said lost out "seems implausibly high".

The Supreme Court considered three test cases before it ruled. 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.