Millions of motorists could soon receive compensation without filing claims under a new redress scheme being developed by the Financial Conduct Authority (FCA) to address widespread mis-selling in the car finance industry. The watchdog is working on an industry-wide initiative that would require banks to identify and compensate affected customers directly, cutting out third-party claims management companies.
Shifting the Burden to Lenders
Currently, drivers must actively lodge complaints to recover losses from mis-sold car loans. However, the FCA wants to change this system by making lenders responsible for identifying customers who were given inappropriate finance deals. This move comes after a year-long investigation into hidden commission structures, where banks allegedly paid car dealerships bonuses based on the interest rates they charged borrowers.
The proposed scheme will specifically target loans tied to “discretionary commission” arrangements. These agreements often incentivized dealers to increase interest rates, potentially leading to excessive costs for consumers.
Supreme Court Ruling and Industry Impact
The Supreme Court is set to rule next month on whether car finance agreements were broadly mis-sold. While that decision may influence the scope of compensation, the FCA’s plan primarily focuses on loans with discretionary commissions.
Several major lenders have already begun preparing for potential payouts. Lloyds Banking Group and Close Brothers have set aside significant reserves, with Lloyds allocating billions of pounds and Close Brothers reserving hundreds of millions.
The industry-wide compensation plan was initially expected in May but has been pushed back for further refinements. Once finalized later this year, the scheme is expected to bring quicker restitution to affected motorists and prevent an influx of speculative claims from unaffected customers.
Consumer Advocates Welcome the Move
Consumer rights advocates have largely welcomed the FCA’s proposal. By shifting the responsibility onto lenders, the scheme is expected to streamline the redress process and ensure that those who suffered financial harm receive compensation more efficiently.
Molly Preleski of PA Consulting noted that the plan “should help to ensure that where consumers have lost out, redress won’t be dependent on them taking action to complain,” while also reducing the number of baseless claims.
If implemented, the FCA’s initiative would mark one of the most significant consumer compensation efforts in recent years, aiming to restore trust in the car finance sector and provide financial relief to affected drivers.
