A compensation scheme to pay out drivers who were mis-sold car finance could cost up to £18bn, the UK’s financial watchdog has revealed.
The Financial Conduct Authority (FCA) has announced plans to consult on a major redress scheme for motorists who may have unknowingly paid inflated borrowing costs due to undisclosed commission payments made to car dealers.
These commissions, often hidden from customers, significantly increased the overall cost of car loans.
The proposed scheme will cover finance agreements dating as far back as 2007, and follows a landmark Supreme Court ruling which found that certain lenders acted unlawfully by failing to disclose large commissions – an omission that rendered many deals unfair.
In a statement issued on Sunday afternoon, the FCA said it would “consult on an industry-wide scheme to compensate motor finance customers who were treated unfairly.”
“Any redress scheme must be fair to consumers who have lost out and ensure the integrity of the motor finance market, so it works well for future consumers,” the regulator added.
The FCA will open its consultation in early October and run it for six weeks. It aims to finalise the rules by early 2026, with consumers expected to begin receiving compensation later that year.
What’s behind the compensation?
The Supreme Court ruled that customers were entitled to full repayment of commissions that had not been disclosed, setting a precedent for large-scale compensation.
In one high-profile case, a dealer received commissions worth 55 per cent of the total cost of credit – something the court described as “a powerful indication” of unfairness.
The redress scheme will apply where customers were not made aware of commission arrangements that may have affected the cost of their loan.
In many cases, dealers had a financial incentive to arrange more expensive loans, directly benefiting from the higher interest rates charged.
While the total cost of the scheme is still uncertain, initial estimates suggest payouts could range from £9bn to £18bn, making it one of the largest consumer redress schemes in UK history.
How compensation will work
Compensation amounts will depend on the level of financial harm caused. The FCA said it will consult on the most appropriate method for calculating redress, with full repayment of commission expected to be the maximum.
Interest payments will likely be included as part of the compensation. The FCA has proposed using the average base rate plus 1 per cent, which equates to roughly 3 per cent simple interest per year.
The scheme will also examine how to ensure affected consumers are informed, with options being considered for opt-in versus opt-out approaches.
What happens next?
Firms are currently not required to issue final responses to relevant complaints before 4 December 2025. However, the FCA said it would consult on whether this deadline should be extended to align with the compensation timeline.
Alex Neill, co-founder of consumer rights group Consumer Voice, welcomed the move but urged caution.
He said: “The devil will be in the details – the big test is whether the scheme will deliver a fair level of compensation at scale.
“There will be big hurdles for the regulator to overcome, including being able to contact all affected drivers and convincing consumers to trust a scheme run by the wrongdoers.”
Despite these challenges, the FCA remains confident the market will remain stable while ensuring fair outcomes for affected customers.
How to claim compensation
Consumers who have already submitted complaints to their lender don’t need to take any further action for now.
Those who believe they were affected but haven’t yet complained are advised to do so as soon as possible.
To avoid losing part of their payout to claims management companies (CMCs), which often charge fees of up to 30 per cent, the FCA strongly recommends that consumers lodge complaints directly with their lender.
Over the past year, the regulator has ordered 225 misleading CMC adverts to be changed or removed due to concerns about misrepresentation in motor finance claims.
The FCA said the upcoming redress scheme is being designed to be simple and accessible, allowing consumers to claim without needing legal or professional help.
Anyone who thinks they might be eligible should review their finance agreements and gather relevant documentation.
Complaints can be made to the finance provider directly, and consumers should keep copies of all correspondence.
