The UK’s financial watchdog has reduced the expected cost of compensating motorists caught up in the car finance mis-selling scandal by around £2 billion, as it unveiled its long-awaited final redress scheme, though the decision is unlikely to end the controversy.
Financial Conduct Authority said total compensation and administration costs will now amount to roughly £9.1 billion, down from earlier estimates of more than £11 billion. The revised figure includes £7.5 billion in direct payouts to consumers and £1.6 billion in operational costs for lenders.
The reduction has been achieved largely by tightening eligibility criteria. Around 12.1 million finance agreements signed between 2007 and 2024 will now fall within scope of the scheme, compared with 14.2 million under the regulator’s initial proposals last autumn.
Despite the lower overall bill, the FCA expects the average compensation payment to increase. Eligible consumers are projected to receive around £829 per agreement, up from an earlier estimate of approximately £700.
The regulator anticipates that around 75 per cent of eligible customers will make a claim, although this assumption could be tested depending on how straightforward the process proves in practice.
At the centre of the scandal are commission arrangements between lenders and car dealers that were not properly disclosed to borrowers, potentially inflating the cost of loans. The FCA banned certain types of commission structures in 2021, but growing complaints prompted a wider investigation launched in 2024.
While the scaled-back scheme offers some relief to lenders, the reaction across the industry has been mixed. Many firms had lobbied heavily for changes, arguing that the original proposals were disproportionate and inconsistent with a Supreme Court ruling last year that was broadly favourable to lenders.
Major institutions including Lloyds Banking Group, which has already set aside nearly £2 billion, and Close Brothers are still expected to face substantial financial impacts. Shares in Close Brothers fell following the announcement, reflecting investor concerns about its exposure.
There is also a growing expectation that the scheme could be challenged in the courts, either by lenders seeking to reduce liabilities further or by consumer groups arguing that compensation levels remain insufficient.
Nikhil Rathi urged the industry to support the scheme, arguing that a coordinated approach would deliver faster outcomes for consumers and help restore trust in the market.
“An industry-wide scheme is the most efficient way of compensating affected consumers while supporting the ongoing availability of competitively priced motor finance,” he said.
The FCA has opted to divide the redress programme into two parts, one covering agreements from 2007 to 2014 and another from 2014 to 2024. While this approach may help process claims more quickly, legal experts warn it could introduce additional complexity and confusion for consumers.
The split also reflects the regulator’s attempt to manage legal risk, particularly around older claims, which have been a major point of contention for lenders.
However, some analysts suggest this strategy may not prevent challenges. The gap between the FCA’s average payout estimate and higher figures suggested by claims firms, often closer to £1,500 per case, could encourage consumers to pursue compensation through the courts instead.
Even in its revised form, the scheme presents a major logistical and financial challenge for the industry. Lenders will need to identify affected customers across millions of historic agreements, calculate appropriate compensation and process claims efficiently.
Richard Pinch of consultancy Broadstone said the scheme would still place significant strain on firms, both in terms of cost and operational complexity.
“This is not just about the scale of compensation, but the difficulty of administering it across decades of lending,” he said.
Consumer advocates have criticised the final scheme as falling short of delivering full redress. Some argue that stricter eligibility criteria could exclude vulnerable borrowers or reduce compensation for those who were most affected.
Legal firms are already preparing to pursue claims outside the FCA’s framework, raising the prospect of prolonged litigation and continued uncertainty for both lenders and customers.
The finalisation of the redress scheme marks a pivotal moment for the UK motor finance sector, which is now confronting one of the largest compensation exercises since the PPI scandal.
For regulators, the challenge has been balancing fair outcomes for consumers with the need to avoid destabilising the financial system. For lenders, the focus shifts to managing the financial hit and rebuilding trust.
For consumers, the key question remains whether the scheme will deliver timely and meaningful compensation, or whether the battle over redress will continue in the courts for years to come.
Read more:
Car finance redress bill cut by £2bn as VCA unveils final compensation scheme