Car Finance Compensation Payouts May Fall Short for Millions

Victims of car finance mis selling could be set to miss out on an average of £500 each due to the compensation calculations proposed by the Financial Conduct Authority. Slater and Gordon, one of the United Kingdom’s largest consumer law firms, has voiced concerns that the approach favours the very banks held responsible for the problem while reducing the total redress for up to 14 million affected car buyers.

The FCA has finished consulting on its formula for calculating compensation and is expected to release further details in the coming months. The current proposal outlines estimated payouts averaging £700 per claimant. Slater and Gordon contends that a fairer figure would be around £1,200, amounting to a combined £8.1 billion reduction in potential compensation across all claimants.

At the core of the dispute are the calculations the FCA intends to use. The regulator proposes a hybrid approach: averaging the total commission paid with its estimate of actual consumer loss. This formula would reduce redress by an estimated £3.5 billion, according to research commissioned by Slater and Gordon. On top of this, the FCA intends to apply an interest rate set at the base rate plus 1 per cent, instead of the 8 per cent benchmark rate that often applies in personal finance compensation. This change could further reduce total payments by £4.6 billion.

Major lenders, including Lloyds, Barclays, Santander and Close Brothers, are preparing for substantial payouts. Lloyds, which operates the UK’s largest car finance business under the Black Horse brand, has already set aside £1.95 billion. The FCA estimates that between April 2007 and November 2024, affected customers may receive a total of £11 billion, comprised of £8.2 billion in compensation and £2.8 billion in administrative costs.

The Finance and Leasing Association has countered the criticisms, arguing the scheme should exclude buyers who experienced no loss. Lenders are considering seeking a judicial review if they believe the scheme is too generous, while Slater and Gordon is prepared to initiate litigation if the terms are not improved for consumers.

Consumers will have a choice: accept the FCA scheme or pursue compensation through the courts. The FCA notes that outcomes from litigation are uncertain and may ultimately lead to lower net compensation once legal costs are deducted. However, the regulator asserts that its scheme will be faster and simpler for claimants to navigate.

The FCA aims to finalise the compensation framework by the end of February, amid ongoing debate about fairness and the long-term consequences for both banks and consumers.