Car finance compensation delayed until 2027 due to legal challenges

Millions of drivers who were mis-sold car finance agreements will not receive compensation until at least 2027, the Financial Conduct Authority has confirmed. The delay is a direct result of legal challenges to the regulator’s central compensation scheme, which are scheduled to be heard by the UK’s Upper Tribunal in February 2027. Consequently, lenders are no longer required to calculate or pay out compensation until the legal process concludes, pushing back payments that were previously expected to begin this year.

The FCA estimates that average payouts under the scheme will amount to approximately £829 per mis-sold agreement. The total cost of the compensation programme, including administrative expenses, is projected to reach £9.1 billion. The decision affects roughly 12 million car loans, representing about 37% of all agreements taken out between April 2007 and November 2024. The vast majority of new cars and many second-hand vehicles in the United Kingdom are purchased through such finance arrangements, where customers pay an initial deposit followed by monthly fees with interest.

The regulator introduced the scheme following a ban in 2021 on discretionary commission arrangements, where car dealers received commission from lenders based on the interest rate charged to the customer. The FCA determined that these arrangements provided an incentive for buyers to be charged higher-than-necessary interest rates. Furthermore, some customers signed unfair contracts because the commission paid to dealers accounted for 39% of the total cost of credit and 10% of the loan amount. Exclusive arrangements between dealers and lenders also meant some customers were not given accurate information about the best available finance deals.

Individual compensation amounts will depend on the degree of harm suffered by each consumer. For those whose contact details have changed, it may take several months before payments are processed. Approximately four million complaints have already been lodged, and those individuals do not need to take further action. The FCA has urged anyone who has not yet complained to contact their car loan provider directly rather than using third-party claims management companies. The regulator’s scheme allows people to complain and potentially receive compensation without the need for a lawyer or court proceedings.

Legal challenges to the scheme have been brought by three lenders: Volkswagen Financial Services, Mercedes Benz Financial Services, and Credit Agricole Auto Finance. The Upper Tribunal has agreed to hear these cases, with hearings scheduled for 16 to 26 February. The FCA stated it would defend the scheme robustly as lawful and the best way to resolve such a widespread issue. If the courts were to overturn the programme, the FCA estimated that up to 19 million complaints would need to be handled individually, a process that could take three years and cost lenders an additional £6 billion.

Consumer Voice has criticised the scheme, stating it leaves too many people short-changed. However, several major lenders, including Santander, Barclays, and Lloyds, have accepted the scheme despite raising concerns that the level of redress is disproportionate to the harm suffered. The Finance and Leasing Association, which represents the lending industry, has expressed concerns but has chosen not to raise a legal challenge. Lenders, including some of the UK’s largest banks and specialist motor finance firms, have already set aside billions of pounds for potential payouts.

The scope of the compensation programme was influenced by three test cases considered by the Supreme Court, which ultimately limited how broad the scheme could be. The court focused on whether car dealers had a duty to act on behalf of their customers rather than in their own interests. In the case of Marcus Johnson, who bought a Suzuki Swift in 2017, the Supreme Court ruled that the terms of his finance deal were unfair due to the size of the commission payment and the fact that he appeared to have been misled over the relationship between the finance firm and the dealer. Motorists have also been warned to be alert for scammers posing as car finance lenders offering fake compensation.