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The Financial Conduct Authority (FCA) has announced plans to consult on a compensation scheme for motorists affected by unfair car finance commission charges, following a landmark Supreme Court ruling that has narrowed the scope of who can claim redress. The courtโs decision on Friday resolved three pivotal cases concerning hidden commission payments made by finance companies to car dealers, which in many instances resulted in consumers paying inflated interest rates without their knowledge.
The Car Finance Mis-selling Scandal
Car financing is a prevalent method by which consumers purchase vehicles in the UK. Approximately two million new and used cars are sold annually through finance agreements, where customers typically pay a deposit followed by monthly installments with interest.
The controversy primarily revolves around so-called discretionary commission arrangements (DCAs), banned in 2021 by the FCA. Under these schemes, dealers received commissions from lenders based on the interest rate charged to the buyer. Critics, including the FCA, argue that these commissions incentivized dealers to steer consumers toward higher interest rates, increasing the overall cost of motor finance.
Between 2007 and 2021, many car buyers were unaware that their finance contracts included these hidden payments, prompting extensive investigations and complaints. By early 2025, the Financial Ombudsman Service had approximately 80,000 unresolved claims related to this issue, with many cases awaiting the Supreme Court verdict to proceed.
Supreme Court Verdict: A Partial Victory for Finance Companies
On August 1, 2025, the UKโs Supreme Court delivered its verdict on three test cases examining whether these commission payments equated to unlawful practices such as bribery, and whether dealers owed a fiduciary duty to act in the best interests of customers rather than their own.
The court upheld two of the cases in favor of finance companies, rejecting accusations of bribery and dismissing claims that dealers had fiduciary obligations toward buyers. This ruling limits the potential pool of claimants, effectively blocking millions of motorists from pursuing compensation.
However, the court did rule in favor of a third claimant, Marcus Johnson, 34, who purchased a Suzuki Swift in 2017 from a dealership in Cwmbran, Torfaen. Unaware that the dealership was receiving a 25% commission from the lender, Mr. Johnsonโs case was deemed unfair by the court due to the size of the commission and the lack of transparency about the dealerโs financial interest.
Reflecting on the outcome, Mr. Johnson told the BBC: โI signed a few documents and then drove away in the car. It was heartbreaking to find out that so much extra money had been taken without my knowledge.โ He added, โIโm pleased for myself, but not for the hundreds of others who will miss out. Itโs a win, but itโs a really big bag of salt to go with it.โ
FCA Chief Executive Sarah Wilkinson said the judgment provides much-needed clarity: โThe Supreme Court ruling helps us because we have been looking at what is unfair, and prior to this judgment, there were conflicting interpretations of the law from different courts.โ
Proposed Compensation Scheme: Scope and Payouts
In light of the ruling, the FCA announced it will begin a formal consultation in October 2025 on implementing a compensation scheme for consumers affected by unfair commission charges in motor finance agreements dating back to 2007.
The regulator estimates that the potential total redress could range from ยฃ9 billion to ยฃ18 billion. While the exact amount individual victims may receive depends on various factors, including the degree of harm suffered, the FCA has indicated payouts are likely to be capped at around ยฃ950 per affected car finance agreement.
โIt is important that any compensation balances fairness to consumers with the need to maintain the affordability and integrity of the motor finance market for future buyers,โ the FCA stated. The authority also emphasized that many millions of consumers could be eligible under the scheme, although the precise number remains uncertain.
Consumers who have already submitted complaints need not take further action at this stage, the FCA advised. Those yet to lodge complaints are urged to contact their motor finance providers directly rather than engaging claims management companies, which may incur additional costs.
Financial Impact on Industry: Providers Set Aside Billions
The cost of compensation is expected to be borne entirely by the car finance industry, including major banks and specialist lenders. Several companies have already allocated significant sums toward anticipated payouts and associated administrative and legal expenses.
Lloyds Banking Group leads with a provision of ยฃ1.15 billion, followed by Santander with ยฃ295 million. Specialist motor finance firms, such as Close Brothers (ยฃ165 million), Northridge Finance (ยฃ143 million), and MotoNovo Financeโowned by South African bank FirstRand have also set aside hundreds of millions.
Mark Harper, a senior analyst at financial services consultancy Fair Finance Watch, noted, โThe size of the provisions shows how seriously lenders are taking the issue. While it poses a significant financial strain, the industry is motivated to resolve these claims to restore consumer confidence in motor finance.โ
Broader Implications and Future Outlook
The ruling and impending compensation scheme highlight broader concerns about transparency and fairness in point-of-sale lending markets. The FCAโs crackdown on DCAs reflects a regulatory push to prevent lenders and dealers from incentivizing higher-cost loans through opaque commission structures.
Professor Helen Marks, a consumer finance expert at the London School of Economics, explained, โThis judgment draws a line under murky lending practices. While itโs disappointing for many claimants, it reinforces the need for robust consumer protections going forward.โ
Industry stakeholders are now watching closely as the FCA prepares its consultation, which is expected to outline eligibility criteria and compensation mechanisms. Some experts caution the complexity of calculating redress, especially for deals dating back almost two decades, may delay payouts.
Meanwhile, MPs and consumer rights groups continue to press for stronger regulation to prevent similar mis-selling scandals in other sectors of the credit market, including personal loans and credit cards.
Key Facts at a Glance
- Finance Agreements: Around 2 million UK car sales per year involve finance agreements.
- Discretionary Commission Arrangements (DCAs): Banned by the FCA in 2021 due to concerns over unfair incentives.
- Supreme Court Ruling: Sided with finance companies in 2 of 3 test cases; allowed a claim for one individual based on unfair terms.
- Estimated Compensation Cost: Between ยฃ9 billion and ยฃ18 billion.
- Typical Payout: Under ยฃ950 per affected deal.
- Timeline: FCA consultation starts October 2025; first payments expected 2026.
- Industry Provisions: Lloyds (ยฃ1.15bn), Santander (ยฃ295m), Close Brothers (ยฃ165m), Northridge (ยฃ143m), MotoNovo (ยฃ140m).
The Financial Conduct Authorityโs move to consult on a compensation scheme marks a significant step towards addressing unfair practices in the UK car finance market. While the Supreme Courtโs decision limits the number of eligible claimants, affected motorists may yet receive meaningful redress for previously undisclosed commission charges. The next phase of consultation will shed light on the practicalities of implementation and the future enforcement of consumer protection in motor finance.
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