FCA Compensation Plan Over UK Car Loans

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A government-backed compensation scheme for mis-sold car finance could cost British lenders up to £18 billion, according to the Financial Conduct Authority (FCA), despite a Supreme Court ruling that appeared to limit the scope of customer claims.

The case centred around a long-standing practice in the motor finance industry where dealers were paid commissions by lenders for arranging loans. These payments, which were not always disclosed to borrowers, were often linked to the interest rate charged, giving dealers a financial incentive to increase loan costs.

On Friday, the UK Supreme Court ruled that such hidden commissions were not unlawful under current regulations. This judgement has significantly narrowed the potential for widespread individual claims, especially from those who had hoped to reclaim money because their agreements were not transparent.

However, the Court did leave room for legal challenges in cases where commissions were “unfair”, particularly those that were disproportionately high or where customers were misled about the nature of the agreement. The FCA said it still expects a substantial number of cases to qualify under this threshold.

In response to the ruling, the FCA confirmed it will proceed with a redress programme for affected drivers. The scheme is intended to address misconduct involving discretionary commission arrangements and could result in compensation payouts ranging from £9 billion to £18 billion, depending on how many cases meet the criteria.

The FCA is currently finalising the details of the scheme and will publish a full outline in September 2025. Those affected may include motorists who took out loans between 2007 and 2021, the period when discretionary commission models were most commonly used in the UK car finance market.

Under the proposed scheme, lenders will be expected to review past agreements and identify customers who were likely mis-sold. If found eligible, drivers could receive compensation without the need to go to court.

The regulator has stated that the scheme will aim to provide fair and consistent outcomes across the board. It has also warned lenders that delays or resistance in implementing the redress could lead to enforcement action.

Motor finance providers are now bracing for a significant financial hit. While some firms have already set aside funds for potential claims, others may face pressure to adjust their financial forecasts and reserves ahead of next year’s formal rollout.

Although Friday’s ruling closed the door on blanket legal claims for hidden commissions, the FCA’s response ensures that many motorists may still have a path to compensation, especially in cases involving unusually high charges or a lack of transparency.