Consumer rights expert Martyn James has pulled together your go-to guide on the car finance compensation scheme
The car finance compensation scheme has finally been confirmed(Image: Getty Images)
It’s been a long time coming, but this week, the FCA finally announced that a compensation scheme would be launched for everyone mis-sold a car finance agreement over a 17 year period.
For years now, the news has been full of stories about car finance and how millions of people might be entitled to a refund for the deals they were sold when they took out credit as a way to own – or temporarily own – vehicles both new and second hand.
But there was one huge problem. The allegations of mis-selling are so enormously complicated, that it’s exceptionally hard for you to know if you have been mis-sold an agreement based on your documentation.
That meant people turned to claims management companies (CMCs) – third party lawyers and complaint handlers who take a cut of your commission (up to 30% and more) – to deal with their complaints for them.
In a relatively short amount of time, over four million complaints had built up while we waited for the courts and the Financial Conduct Authority (FCA) to decide if mass mis-selling had taken place.
So now the compensation scheme has been announced. But what happens next is by no means straightforward. Here’s my guide.
What are the key things that I need to know?
The Financial Conduct Authority (FCA) has announced proposals for a compensation scheme for millions of drivers who may have been mis-sold deals to buy a car or vehicle on finance
The main things to remember are:
- You need to have been sold a motor finance agreement taken out between 06 April 2007 and 01 November 2024.
- The compensation scheme only applies if you were misled in to taking out an unfair contract, given inaccurate information or excessive commission was paid by the lender to the broker,
- It’s estimated that the scheme will apply to around four in ten car loans (40%) sold during this period.
- The FCA estimates that up to 12.1 million loans could be applicable for compensation.
- The total costs of the scheme will be around £9.1 billion including administration costs. £7.5 billion of that sum is compensation.
- The average payout is predicted to be £829 – but that sum will very much vary depending on the circumstances.
What’s the problem with car and vehicle finance?
If you’ve bought a car or vehicle in the last two decades, chances are you’ve taken out a Personal Contract Plan (PCP).
These finance agreements are ludicrously complicated and many featured large ‘hidden’ commission payments.
You don’t need to know how all of this works to make a claim or receive a payout. But here are the agreements where the FCA has concluded there were elements that were unfair and therefore eligible for compensation:
- Discretionary commission arrangements or DCAs , which allowed the seller to adjust your interest rate to obtain a higher commission. Most claims will involve DCAs.
- High commission arrangements , where the amount of commission was so high it was deeply unfair. For very high commission cases there are special ways of working out compensation.
- ‘Tied’ agreements , where the lender and broker had a financial agreement to exclusively or mostly sell credit with specific lenders.
What happens if I’ve complained already?
If you’re one of the four million people who’ve already complained, you’ll be contacted first once the scheme starts. You will be automatically included in the compensation guidelines as set by the FCA, unless you contact the lender to say otherwise.
A good place to start if you’re not sure what to do is to go to the FCA website.
What if I’ve not complained?
If you’ve not made a complaint yet, you have two options. You can wait for the lender (the firm that provided the credit) to contact you. Or you can make a claim to them now.
In theory, you’ll be processed quicker if you register a complaint. But given the volumes of people who may be entitled to compensation, it makes sense to gather as much information as you can now so you can speed up the process.
Alternatively, the lender should contact you if you’re likely (not definitively) to qualify for compensation. There are two timescales for this. Here are the dates you should hear from the lender by for those who make a complaint and those who don’t.
If your agreement began between April 6, 2007 to March 31, 2014
- If you complained before 31 August 2026 , you should hear from your lender whether you’re owed money, and if so, how much, by 30 November 2026. If you accept the offer, you should be paid what you’re owed within a month.
- If you don’t complain, lenders should contact you by 28 February 2027 if you’re eligible. You’ll then have six months to reply to your lender to tell them you want to be included in the scheme. Once you’ve replied, you’ll be told how much you’re owed within three months. This should happen by 30 November 2027 at the latest. If you accept the offer, your lender will have one month to pay you.
If your agreement began between April 1, 2014 to November 1, 2024
- If you complained before 30 June 2026 , you should hear from your lender whether you’re owed money, and if so, how much, by 30 September 2026. If you accept the offer, you should be paid what you’re owed within a month.
- If you choose not to complain, lenders will contact you by 30 December 2026 if you’re eligible. You’ll then have six months to reply to your lender to tell them you want to be included in the scheme. Once you’ve replied, you’ll be told how much you’re owed within three months. This should happen by 30 September 2027 at the latest. If you accept the offer, your lender will have one month to pay you.
Why the differing timescales? Well… earlier policies are more likely to be the subject of a potential judicial review of the regulator’s decision (we don’t know this will happen, it’s a ‘what if’). This could delay things. In addition, there is the complexity of investigating older sales of car finance deals and potentially higher sums added to the loans.
Can I trust the business to contact me?
If you’ve not been contacted, now is the time to start digging around in the back of your drawers to find your old agreements.
If you are struggling to find them, your credit reference report may list old deals and bank statements could help you figure out who the lenders were. I’m told that some credit reference agencies have apps that will allow you to do this much more easily – though only request your free statutory data. Don’t pay for it.
If you’ve already been compensated, or the Financial Ombudsman or lender rejected your claim, you should be contacted if you are entitled to further compensation.
You can find out information, get updates and download template letters on free websites like Consumer Voice and MoneySavingExpert.
How much compensation will I get?
*Takes a deep breath*
The FCA has put together a compensation scheme that factors in all kinds of things, including:
- The type of credit / loan you had.
- The difference between the interest rate you were charged and a comparable rate on the market at the point of sale.
- Any excessive commission you might have paid.
- Interest you might have earned had you had that money (simple interest, not compound).
But wait. There are a range of other factors that are considered that makes it very difficult for the average person (and me) to figure out exactly what they will get. The compensation scheme caps some aspects of compensation and interest so you could get more if you went to court… but you could pay much more in legal or claims manager fees.
If you want to see an example showing how the calculation works, check out MSE. The simplest way I can explain this (for most cases) is to say:
- Look at the total amount of your loan that you paid including interest and commission.
- Reduce the total interest (APR) that you paid by either 17% or 21% depending on when the loan was sold (this is the bit that’s super hard to work out as it’s not 17% or 21% off the total final loan amount).
- Add this figure to the commission you paid.
- Divide by two (the ‘mean’ sum).
- Voila!
You’ll get a letter with the calculations on it if a compensation offer is made, which you can then ask the firm to explain if you are unsure, or complain about if you think it’s wrong.
Do I need to use claims management companies and solicitor firms?
Claims management companies or CMCs are firms that will bring complaints or claims on your behalf for a fee. You do not need to use them to claim compensation under the FCA’s scheme. You’re throwing your money away.
Many people have asked me if it’s worth going to court for a higher payout. The current scheme doesn’t offer ‘compound interest’. This is where the interest paid on compensation is added to the total and interest goes on top of that sum. The scheme also caps compensation limits and doesn’t pay out the amount you may have been overcharged in its entirety.
It’s possible that this will be challenged in the courts. But bear in mind the first court case was only upheld in only one of the three aspects put to the court. CMCs will also charge you around 30% on average from your compensation. And solicitors acting solely for you will charge you much, much more.
I really do understand that people may be dissatisfied with the compensation scheme as it stands, particularly given it’s so hard to understand how the payouts work. But in simple terms, your choices are: easy – go with the scheme, or hard: go through the courts.
The broker / garage / lender isn’t being helpful
I’ve been overwhelmed by people telling me that the firm they bought their vehicle from, or the lender, has declined to help, told them there is no documentation or been downright difficult.
The FCA assures me that it is closely monitoring how businesses deal with complaints and how they contact and compensate individuals. But if you feel you are being fobbed off, you can make a complaint to the free Financial Ombudsman Service.
Claims Management Ombudsman you can contact if you’re unhappy.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist
