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The Financial Conduct Authority (FCA) has confirmed that final rules for the industry-wide car finance redress scheme will be announced by the end of March 2026.
People who were overcharged – primarily through discretionary commission arrangements (DCAs) and other commission types – are each expected to receive average compensation payments of around £700.
The scheme follows a Supreme Court ruling that led the FCA to conclude that some motor finance firms breached consumer law, while others broke FCA rules, by failing to properly disclose commission payments made by lenders to car dealers.
Here, Which? explains everything you need to know about car finance mis-selling – including how the FCA's compensation scheme will work, who can get a payout, and what you need to do to claim your money.
Most new cars, and many second-hand ones, are bought using finance agreements – around two million are sold this way each year.
These deals usually involve paying an initial deposit, followed by monthly instalments with interest.
Before 28 January 2021, some car finance lenders had DCAs with brokers. Under these agreements, brokers and car dealers could increase the interest rate on a finance deal to earn more commission.
The FCA said this created an incentive for customers to be charged more interest than necessary, leading to higher overall costs.
It estimates that 99% of finance deals had a commission model – including for cars, vans, campervans and motorbikes – and around 40% are believed to have had DCAs.
The FCA banned DCAs in January 2021, but many people complained that they were overcharged before the ban came into force.
The regulator launched an investigation in January 2024 into potential overcharging of motor finance customers between April 2007 and January 2021 through DCAs.
The FCA's investigation was prompted by a Financial Ombudsman Service (FOS) decision against Barclays, which found the bank had unfairly paid commission to a credit broker.
At the same time, a separate legal case was moving through the courts. This involved lenders Close Brothers and FirstRand Bank, and centred on whether car finance agreements were unlawful if the commission paid to dealers wasn’t properly disclosed to customers.
The Court of Appeal ruled against the lenders – a decision that could have meant almost all car finance customers were eligible to claim compensation. The lenders appealed to the Supreme Court.
The FCA paused its own work while waiting for the outcome, as the ruling would determine the scope of the compensation scheme.
However, the Supreme Court overturned the Court of Appeal decision, ruling that hidden commissions were not unlawful and that dealers did not have a legal duty to act solely in the customer’s interest.
The Supreme Court’s decision narrowed the scope of the FCA’s redress scheme. Instead of covering almost all car finance deals, it will now apply mainly to DCAs and potentially some other commission models.
You could be due compensation under the redress scheme if:
Alongside this, the FCA says you must also not have been told about at least one of the following arrangements between the lender and broker who sold the loan:
The FCA says there could be ‘rare circumstances’ where the lender may be able to show that, even if one or more of these features were undisclosed, there was no unfairness.
Where evidence is missing about what was disclosed, lenders must presume they didn’t give borrowers enough information.
Customers with agreements that only had undisclosed commissions won’t receive compensation automatically. However, if you think you weren’t told about commission and may have paid too much for the finance, you should complain.
The financial regulator said it would provide compensation payments for approximately 14m motor finance agreements from April 2007 to November 2024.
It estimates that 44% of all agreements made since 2007 will be eligible for payouts. Motorists who had multiple agreements during the period could get more than one compensation payment.
The regulator expects around 85% of eligible consumers to participate in the redress scheme, with lenders potentially set to pay out £8.2bn in compensation.
Based on current estimates, the average payout per person will be around £700.
The FCA said that, in the ‘very unlikely’ event of 100% take-up, firms would owe up to £9.7bn in redress payments.
Nikhil Rathi, chief executive of the FCA, said: 'Many motor finance lenders did not comply with the law or the rules. Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.'
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The FCA has confirmed a few details about the redress scheme, although the final rules are expected to be published by the end of the month.
For the four million people who have already submitted a complaint, the regulator has ‘streamlined’ the process to reduce delays.
Under the new rules, these consumers will no longer face a formal ‘opt-out’ period. Instead, lenders will automatically assess their cases and must confirm within three months if compensation is owed. Any compensation offers can now be accepted immediately, rather than waiting for a mandatory cooling-off period.
Once the scheme is officially live, lenders will also be required to proactively reach out to eligible customers who have not yet come forward. The FCA will now allow firms to use digital communication channels, such as email, provided they have sufficient fraud protections in place.
Drivers who have not yet complained can still do so by contacting their lender directly. The FCA’s website also offers guidance for those who are unsure who their lender was or how to track down an old finance agreement.
Submitting a complaint now will make sure that a case is already in the system when lenders begin their formal assessments when the redress scheme goes live.
If you think you've been affected by car finance mis-selling, see our guide on how to complain about a commission arrangement on a car finance loan. You can also use our free template letter to submit your complaint.
In its 4 March update, the FCA announced when the scheme goes live, lenders are to be given a three-month implementation period to pay out compensation, with up to five months for older motor finance agreements.
This means compensation payments will likely not start to appear until later in the year.
With its opt-out changes, the FCA says it will speed up the process for the four million people who have already complained.
You don’t have to take part in the FCA’s compensation scheme if you don’t want to. You also have the option of taking your case to court.
The regulator says those who take their case to court could receive a larger compensation payment, although the outcome would depend on the facts of each case and could involve legal costs.
The FCA noted that its compensation scheme will be faster and simpler than pursuing legal action.
If you use a claims management company (CMC), you’ll need to give part of your payout to that firm if your claim is successful.
At the moment, there are many adverts on social media encouraging drivers to sign up with these companies.
The FCA and the Solicitors Regulation Authority (SRA) have urged consumers not to rush to sign up with CMCs or law firms, as they may charge fees of up to 30% from any award.
If you are using one, the FCA and SRA said the companies must inform you of the redress scheme currently under consultation. They must also alert you to all charges and must be clear on exit fees.
The regulator added: 'We will continue to act against firms using clickbait-style promotions or language that suggests a guaranteed outcome before any investigation into a consumer’s claim has taken place.
'Firms must ensure that all financial promotions are clear, fair, and not misleading, and that they accurately reflect the nature and status of any potential claims.'
The following is a timeline of key events regarding the ongoing investigation into car finance mis-selling.
Two years later, in July 2023, the FCA's new Consumer Duty was launched. This aimed to set a higher and clearer standard for consumer protection in financial services as it required the financial service industry to put customers' needs first.
It applied to all new products and services – including car finance.
The FCA disclosed that around 10,000 car finance commission complaints had been referred to the FOS, with 90% of referrals coming since the start of 2022.
The FCA launches a major investigation into car finance mis-selling with a focus on DCAs.
It also announced a pause on the handling of complaints about car finance agreements involving a DCA. This pause meant lenders did not need to respond to complaints until September 2024.
In April 2024, Clydesdale Financial Services, which operates as Barclays Partner Finance, challenged a decision by the FOS which ruled against them in a car finance complaint.
At the same time, the FCA wrote to all car finance lenders telling them to ensure that they have enough money to cover any potential future compensation payments that might result from their past use of DCAs.
The FCA also gave an update on its investigation into these DCAs, noting that while many lenders were cooperating, they were slow to provide the data that had been requested.
In May 2024, the FOS said it was unlikely to issue final decisions on DCA complaints pending the outcome of Barclays’ judicial review and the Court of Appeal judgement from lenders Close Brothers and FirstRand Bank.
The FCA extended the deadline for the pause on complaint handling until 4 December 2025, as it waited for the outcome of both the Court of Appeal case and the judicial review.
On 25 October 2024, the Court of Appeal ruled in favour of three borrowers filing complaints against Close Brothers and FirstRand Bank for potential car finance mis-selling.
The Court of Appeal determined that it was unlawful for car finance companies not to inform customers of any commission earned, whether that is discretionary and fixed percentage commissions.
This ruling meant that car finance agreements that included non-discretionary commissions could also be open for claims.
However, both companies appealed the decision to the Supreme Court.
The High Court upheld the complaint against Barclays Partner Finance. Alongside this, the Supreme Court confirmed it would hear the appeals in all three cases from October's Court of Appeal judgement.
The FCA also extended a pause on firms handling car finance complaints to include all types of commission, not just DCAs, from 26 October 2024.
The FCA announced plans to consult on a redress scheme and stated that it will announce the next steps for complaints six weeks after the Supreme Court's decision.
The Supreme Court heard the appeal against the October 2024 ruling.
The Supreme Court overturned the Court of Appeals decision, which ruled that commission payments paid by buyers to car dealers were unlawful.
The panel of five judges sided with lenders Close Brothers and FirstRand Bank and found that they are effectively not liable for hidden commission payments to dealers.
It said there was no bribery involved in the purchase arrangements and that dealers did not have a legal obligation that required them to act only in the customers’ interest.
The FCA launches a consultation on a proposed redress scheme for those who were overcharged through car finance deals between April 2007 until November 2024. The consultation scheme will run until November, and the scheme is expected to start in 'early 2026'.
The FCA confirmed that the pause on firms handling motor finance complaints will end on 31 May 2026.
FCA confirms car finance redress scheme rules will be outlined and announced by the end of March 2026.
This story was first published on 16 January 2024. It was last updated on 4 March.
