Delays in payment may arise from intricacies in the car financing compensation program
The Financial Conduct Authority (FCA) has announced that it will consult the finance industry on a scheme to compensate car buyers who paid excessive commission charges on car loans dating back to 2007. This decision follows the Supreme Court's landmark ruling in early February regarding three cases involving salespeople being incentivized to charge higher interest rates without the knowledge of buyers.
The controversy stems from a year-long battle between lenders, legislators, and the government over these cases. The FCA's announcement marks a significant step towards addressing the issue and providing redress for affected consumers.
The FCA's consultation will outline how firms should assess fairness and determine compensation, aiming for a scheme fair to consumers who lost out and ensuring the integrity of the motor finance market for future consumers. The consultation period is expected to last six weeks, with the scheme operational in 2026.
In determining what constitutes an unfair relationship under the Consumer Credit Act (CCA), the FCA will consider several factors. A key factor is the size of the commission relative to the overall finance arrangement, with a 55% commission on the total cost of credit being a strong indication of unfairness if undisclosed. Other considerations include whether the commission was properly disclosed to the consumer, the nature of any misleading communications suggesting impartiality by the dealer, the consumer’s financial sophistication, and the commercial relationship between the dealer and the lender.
The review by the FCA will be published in early October 2025. However, critics argue that the scheme may be overly broad and complex, potentially delaying claim resolutions for years. There are concerns that the process may be delayed due to the complex nature of the cases and contradictory views between the FCA and courts.
The potential compensation fund for affected borrowers is estimated to be between £9bn and £18bn. In one of the cases, known as the Johnson case, the Supreme Court found that the commission charged and how it was disclosed pointed to an unfair relationship between banks and car dealers, making it illegal under the CCA. In two of the cases, discretionary commission arrangements (DCA) were ruled legal.
The FCA views nondisclosure of certain features within lending agreements as unfair, while the Supreme Court does not consider nondisclosure or partial disclosure of a commission paid by a finance company to a dealer as unfair. The FCA will need to weigh up a range of factors to decide what it considers to be unfair, including the 'characteristics' of the consumer (yet to be defined, related to the Court's comment regarding consumer sophistication), compliance with regulatory rules, and the extent and manner of a commission's disclosure.
In summary, the FCA is preparing to publish a consultation by early October 2025 on an industry-wide redress scheme to compensate motor finance customers who were treated unfairly, particularly focusing on issues around commissions paid to car dealers under discretionary and non-discretionary commission arrangements. The scheme is expected to cover agreements dating back to 2007, and the FCA has not yet decided whether it will be opt-in or opt-out. The consultation period is expected to last six weeks, with the scheme operational in 2026.
- The business and finance sectors will closely follow the Financial Conduct Authority's (FCA) consultation on an industry-wide redress scheme, as it aims to compensate motor finance customers who have been treated unfairly due to excessive commission charges on car loans dating back to 2007.
- The FCA's consultation will address concerns in the business and finance industry, as it seeks to outline fair assessment methods and compensation determinations, ensuring a fair motor finance market for future consumers and providing redress for affected consumers.
