The UK financial watchdog has slashed the expected cost of compensating motorists caught up in a car finance mis-selling scam by almost £2 billion as it unveiled its long-awaited final redress plan, although the decision is unlikely to end the controversy.
The Financial Conduct Authority said total compensation and administration costs would now be around £9.1 billion, down from an earlier estimate of more than £11 billion. The revised figure includes £7.5 billion in direct payments to consumers and £1.6 billion in operating costs for lenders.
This reduction has been largely achieved by tightening the eligibility criteria. Some 12.1 million finance deals signed between 2007 and 2024 will now fall within the scope of the scheme, compared with 14.2 million under the regulator's initial proposals last autumn.
Despite the overall bill being lower, the FCA expects the average compensation payout to increase. Eligible consumers are estimated to receive approximately £829 per contract, up from an earlier estimate of approximately £700.
The regulator estimates that about 75 per cent of eligible customers will make a claim, although testing this assumption will depend on how straightforward the process proves to be in practice.
At the heart of the scam are commission arrangements between lenders and car dealers that were not properly disclosed to borrowers, potentially driving up the cost of the loan. The FCA banned some types of commission structures in 2021, but a wider investigation was launched in 2024 due to increasing complaints.
Although the scale-back plan provides some relief to lenders, the response across the industry has been mixed. Many companies had lobbied heavily for the changes, arguing that the original proposals were inconsistent and inconsistent with a Supreme Court ruling last year that was largely favorable to lenders.
Major institutions including Lloyds Banking Group, which has already set aside almost £2 billion, and Close Brothers are still expected to face substantial financial impacts. Close Brothers shares fell following the announcement, reflecting investor concerns about its risk.
There is also growing expectation that the plan could be challenged in the courts, either by creditors seeking to further reduce liabilities or by consumer groups arguing that the level of compensation is inadequate.
Nikhil Rathi urged the industry to support the scheme and argued that a coordinated approach would provide faster results for consumers and help restore confidence in the market.
“The industry-wide scheme is the most effective way to compensate affected consumers while supporting the ongoing availability of competitively priced motor finance,” he said.
The FCA has opted to split the redress program into two parts, one covering agreements from 2007 to 2014 and the other covering agreements from 2014 to 2024. While this approach could help claims be processed more quickly, legal experts warn it could create additional complexity and confusion for consumers.
The split also reflects the regulator's effort to manage legal risk, particularly around legacy claims, which has been a major point of contention for lenders.
However, some analysts suggest that this strategy may not prevent challenges. The difference between the FCA's average payout estimate and the higher figures suggested by claims firms, often close to £1,500 per case, may encourage consumers to seek compensation through the courts.
Even in its modified form, the scheme poses a major logistical and financial challenge to the industry. Lenders will need to identify customers affected by millions of historical settlements, calculate appropriate compensation, and process claims efficiently.
Richard Pinch of consultancy Broadstone said the plan would still place significant pressure on companies in terms of both cost and operational complexity.
“It is not just about the scale of the compensation, but about the difficulty of administering it over decades of borrowing,” he said.
Consumer advocates have criticized the final plan for failing to provide a complete solution. Some argue that strict eligibility criteria could exclude vulnerable borrowers or reduce compensation for those who were most affected.
Law firms are already preparing to pursue claims outside the FCA framework, raising the prospect of lengthy litigation and continuing uncertainty for both lenders and customers.
The finalization of the redress plan marks a significant moment for the UK motor finance sector, which now faces one of the largest compensation exercises since the PPI scandal.
For regulators, the challenge has been to balance fair outcomes for consumers with the need to protect the financial system from becoming destabilized. For lenders, the focus turns to managing the financial hit and rebuilding confidence.
For consumers, the key question remains whether the plan will deliver timely and meaningful compensation, or whether the fight for redress will continue in the courts for years to come.
jamie young
Jamie is a senior reporter at Business Matters, with over a decade of experience in UK SME business reporting. Jamie has a degree in Business Administration and regularly attends industry conferences and workshops. When Jamie is not reporting on the latest business developments, he is passionate about mentoring budding journalists and entrepreneurs to inspire the next generation of business leaders.