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Compensation payments on almost 14 million unfair motor finance deals could begin next year, averaging around £700 each, under a proposed plan from the UK financial watchdog.
The Financial Conduct Authority (FCA) estimated that its redress scheme could cost lenders £8.2 billion in compensation, based on about 85% of eligible consumers participating.
The figure rises to £9.7 billion if all eligible consumers are compensated, which it said was highly unlikely.
The FCA had previously estimated that lenders could accrue bills totaling between £9 billion and £18 billion.
It was also previously said that drivers could receive as little as £950 in compensation per motor finance deal, but it has now been confirmed that payouts are likely to be around £700 on average.
It is estimated that around four million car finance deals are already subject to complaint – leaving around ten million that could still be raised.
consumers There may be more than one car loan that is eligible for compensation.
The regulator said motor finance companies broke the law or its rules by not properly informing customers about commissions paid by lenders to car dealers selling loans to customers.
This meant that many motorists did not have the opportunity to negotiate or find a better deal and so would have paid higher interest rates for their loans.
The watchdog is examining data from approximately 32 million agreements executed between 2007 and 2024.
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Around 44% of those would be considered unfair and would be eligible for compensation under the FCA’s proposals.
It believes that setting up a free compensation scheme will make it easier to access for clients, and more cost-effective for firms by removing many of the legal and administrative tasks.
offers come one after another Supreme Court Ruling in August that lenders were not liable for hidden commission payments on car finance agreements.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not follow the law or regulations.
“Now that we have legal clarity, it is time for their customers to be fairly compensated. Our plan aims to make it easier for people to access and easier for lenders to implement.
“We believe there will be wide-ranging views on the scheme, its scope, time frame and how compensation is calculated.
“On such a complex issue, not everyone will get everything they want.
“But we want to work together on the best possible plan and quickly draw a line under this issue.
“This certainty is vital, so a reliable motor finance market can continue to serve millions of families every year.”
Most of the car finance deals covered under the scheme involve a so-called discretionary commission arrangement (DCA).
This refers to the arrangement whereby brokers, including car dealers, were able to raise interest rates on car loans so that they could earn higher commissions.
The FCA advises any consumer who thinks they may be eligible for compensation to contact their lender or broker if they have not already done so.
Lenders will have three months from the date the scheme launches early next year to contact customers who have already complained – and six months to contact customers who have not.
Mr Rathi said: “We are expecting all lenders to make reasonable efforts to contact their customers who may be eligible and may be affected, so we certainly hope that they will be able to reach as wide a group as possible within the time frame we have set.
“If anyone is not contacted, they will have one year from the date the scheme started to complain to their lender.”
“We definitely want this issue resolved and we want it resolved quickly,” he said.
“We believe that if this can be achieved then we can ensure that some trust and confidence in the market can be repaired.”
The FCA said its plan focuses on around 30 lenders who make up about 89% of the motor finance market.
The watchdog has repeatedly warned consumers that they do not need to use a claims management company (CMC) or law firm to access its compensation scheme, and they may face unnecessary charges if they do.