Banks face massive payouts as FCA edges closer to car finance compensation scheme

The Financial Conduct Authority (FCA) is on the verge of introducing a compensation scheme that could see banks proactively inform borrowers if they have been mis-sold car loans, potentially resulting in billions of pounds in redress. This development arises amid escalating concerns over the widespread mis-selling of motor finance, a scandal reminiscent of the Payment Protection Insurance (PPI) debacle.

The FCA announced on Tuesday that it would release its decision on the proposed scheme within six weeks of the conclusion of a crucial Supreme Court hearing scheduled for early next month. If implemented, the scheme would compel lenders to identify and reimburse affected borrowers without the need for them to lodge complaints. Consumer expert Martin Lewis has described the move as one that could significantly extend the net of compensation while eliminating the dependency on costly claims management firms.

Estimates suggest that payouts could average just over £1,100 per borrower, with the overall financial impact on major lenders such as Santander UK, Close Brothers, Barclays, and Lloyds predicted to reach a staggering £44 billion. The scandal, which traces back to the FCA’s investigation in January 2024, revolves around discretionary commission arrangements (DCAs) used by car dealerships and brokers between 2007 and 2021. These arrangements allowed intermediaries to determine interest rates on loans, earning higher commissions in the process.

A pivotal Court of Appeal ruling last October deemed such practices unlawful, as car dealers and brokers failed to disclose secret commissions to borrowers. This vastly expanded the scope of the scandal and prompted lenders to prepare for substantial compensation bills. Two involved lenders, Close Brothers and FirstRand, have filed appeals with the Supreme Court to contest the ruling, with hearings set to take place from 1 to 3 April.

The FCA has been granted permission to intervene in the case and has supplied confidential submissions to the court. It revealed that should the Supreme Court validate borrowers’ claims of financial loss due to widespread failings by lenders, it would likely consult on an industry-wide redress programme. Such a programme would simplify the process for consumers, bypassing the need for complaints and ensuring they retain all compensation awarded without deductions by claims companies.

Analysts suggest that for a typical £10,000 four-year car loan issued under a DCA, borrowers may have overpaid by around £1,100 in interest. Compensation payments may also include interest on overcharged amounts. The outcome of this case and the FCA’s subsequent decision stand to reshape how the motor finance industry addresses its past malpractices and ensures greater consumer protection moving forward.