FCA Motor Finance Compensation Scheme Could Refund 14 Million UK Drivers

Oct 8, 2025 - 11:54

FCA Motor Finance Compensation Scheme Could Refund 14 Million UK Drivers

The Financial Conduct Authority (FCA) has announced a landmark proposal — the FCA Motor Finance Compensation Scheme — that could see around 14 million UK motorists receive refunds totalling an estimated £8.2 billion. This plan aims to compensate drivers who were unknowingly overcharged on car finance agreements between April 2007 and November 2024.

The scheme marks one of the largest consumer redress initiatives in UK financial history, following a string of court rulings and investigations into how brokers and lenders handled motor finance commissions.

Why the FCA Motor Finance Compensation Scheme Was Introduced

The FCA launched this initiative after discovering widespread use of Discretionary Commission Arrangements (DCAs) between car dealers and lenders. Under these deals, brokers could increase a customer’s interest rate to earn higher commissions — without the buyer’s knowledge.

This practice created conflicts of interest, as dealers benefited from selling loans at more expensive rates. For years, many customers were unaware they were paying more than necessary for their car finance.

In January 2021, the FCA officially banned DCAs, labelling them unfair to consumers. However, millions of older contracts remained affected. After court challenges clarified the legal position, the regulator decided to introduce a unified redress framework to prevent inconsistent outcomes and lengthy litigation.

Court Rulings That Triggered the Compensation Plan

The FCA’s decision follows two key legal cases that reshaped the landscape of UK motor finance.

Court of Appeal (October 2024): The court ruled that failing to disclose commissions could make car loan agreements “unfair,” opening the door to compensation claims worth up to £45 billion.
Supreme Court (August 2025): The highest court refined the scope, confirming that undisclosed high commissions can still lead to an “unfair relationship” under the Consumer Credit Act.

These rulings gave the FCA the legal clarity it needed to design a standardised compensation structure, ensuring all affected consumers are treated equally.

Who Is Eligible for the FCA Motor Finance Compensation Scheme

The proposed scheme applies to personal car finance agreements such as Personal Contract Purchase (PCP) or Hire Purchase (HP) plans. To qualify, the finance agreement must have been signed between 6 April 2007 and 1 November 2024.

Here’s a breakdown of eligibility:

Criteria	Details
Loan Types	Personal Contract Purchase (PCP) and Hire Purchase (HP)
Timeframe	6 April 2007 – 1 November 2024
Key Triggers	1. Undisclosed Discretionary Commission Arrangement (DCA) 2. High commission (≥35% of total credit cost and ≥10% of loan amount) 3. Exclusive tie-up between broker and lender
Exclusions	Business or leasing finance, transparent fixed-rate commissions, and low-rate agreements below the defined thresholds

The FCA estimates that about 44% of 32 million car finance deals made during this period may be eligible, meaning around 14 million drivers could receive refunds.

How the Compensation Will Be Calculated

The FCA Motor Finance Compensation Scheme will calculate redress based on the level of undisclosed commission and the excess interest paid by consumers.

1. Standard Cases

For most claims, compensation will be based on the average of the overpaid interest and the undisclosed commission, plus simple interest at the Bank of England base rate plus 1%, dating back to when the payments were made.

Example:
If a motorist paid £4,000 in interest and the undisclosed commission was £1,200:

Average of (£4,000 × 17%) + £1,200 = £940
Add interest for the time period since the loan — leading to a potential refund of over £1,000.

2. Serious or “Johnson-Type” Cases

If the undisclosed commission was ≥50% of the credit cost and ≥22.5% of the total loan, the borrower will get back the full commission amount plus related interest — following the Supreme Court’s Johnson ruling.

The average payout under the FCA’s proposal is expected to be around £700 per agreement, but consumers in high-commission cases could receive significantly higher sums.

Timeline for the FCA Motor Finance Compensation Scheme

The regulator has laid out a detailed timeline for consultation, approval, and payment processing:

Milestone	Expected Date
Consultation Period Ends	18 November 2025
Rules Finalised and Scheme Approved	Early 2026
Lenders Contact Eligible Customers	Mid-2026
First Payments Issued	Late 2026
Scheme Completion	By 2028

The FCA will oversee the rollout, ensuring lenders contact both existing complainants and customers who have not yet raised a claim. Consumers will then have six months to opt in once contacted.

How Drivers Can Claim Their Refund

Drivers don’t have to wait until the scheme is finalised to take action. The FCA advises consumers to:

Locate Car Finance Documents: Find loan agreements, account numbers, or bank statements related to the finance deal.
Contact the Lender: File a written complaint directly with the lender — using free templates provided by the FCA or MoneySavingExpert.
Avoid Claims Management Companies: These firms can charge up to 30% of any payout, but complaints can be made directly at no cost.
Keep Copies of All Correspondence: This helps if the claim is escalated later.
Update Contact Details: Ensure lenders can reach you when the scheme officially launches.

If a lender delays or rejects a complaint, consumers can still escalate the issue to the Financial Ombudsman Service (FOS). The FOS is currently holding many complaints until the final FCA rules are in place.

What the Scheme Means for Lenders

The FCA Motor Finance Compensation Scheme will have major implications for car finance lenders, brokers, and insurance providers.

Total Cost: Around £8.2 billion in core redress payments, with operational and administrative costs bringing the total to approximately £11 billion.
Industry Impact: Around 30 major lenders, covering about 89% of the UK motor finance market, will bear most of the financial burden.
Insurance Response: Professional indemnity insurers view the scheme as a significant regulatory event, with potential ripple effects on future premiums.
Investor Confidence: Analysts suggest that a structured, uniform scheme will reduce market uncertainty and protect investors in auto-loan-backed securities.

While lenders face substantial costs, many industry observers believe a single, FCA-managed redress process is better than years of individual court claims.

Consumer Impact and Market Reaction

Consumer rights groups have welcomed the proposal, calling it a “historic moment” for UK drivers. According to advocates, this scheme ensures fairness and transparency in car finance, restoring trust between customers and lenders.

Financial analysts note that while the total payout is substantial, it will likely boost consumer spending once compensation payments start reaching households from 2026 onward.

Some lenders and industry associations, however, have expressed concerns about administrative costs and the potential strain on smaller finance providers. Despite this, the general response from the market has been cautiously optimistic, given that the scheme provides legal certainty and clear timelines.

The FCA’s Broader Consumer Protection Strategy

This proposal aligns with the FCA’s long-term goal of promoting transparency and fairness in financial services. The regulator has increased its focus on consumer outcomes in recent years, following similar large-scale compensation initiatives like the PPI refund scheme, which returned over £38 billion to UK consumers.

By introducing the FCA Motor Finance Compensation Scheme, the regulator aims to prevent future mis-selling and ensure lenders disclose all commissions clearly to borrowers.

The FCA has emphasised that it wants to make the process simple and automatic, with lenders proactively contacting affected customers rather than requiring individuals to initiate claims.

What Happens Next

The consultation period for the scheme is open until 18 November 2025. After that, the FCA will review feedback from lenders, consumer groups, and the public before finalising the rules in early 2026.

Once implemented, lenders will be required to:

Identify affected customers,
Notify them in writing,
Offer calculated compensation,
Complete payments within the given timeframe.

Consumers who believe they might be eligible should stay informed through official FCA updates and avoid third-party firms that charge unnecessary fees.

Potential Economic and Legal Significance

Experts say the FCA Motor Finance Compensation Scheme could reshape the UK car finance landscape for years. By creating a consistent approach, the FCA avoids a repeat of fragmented legal battles and inconsistent judgments across courts.

Moreover, this initiative strengthens consumer confidence in regulated finance, potentially improving relationships between borrowers and lenders.

Financial commentators also expect the move to serve as a warning for other industries where commission-based sales remain common, such as insurance and retail credit.

Key Takeaways

Around 14 million UK motorists could receive refunds under the FCA Motor Finance Compensation Scheme.
The average payout is estimated at £700, though some could receive more.
Eligible loans were taken between April 2007 and November 2024 under PCP or HP arrangements with undisclosed commissions.
First payments are expected in late 2026, with the scheme completing by 2028.
Consumers can complain directly to lenders for free — no need for claims firms.

Disclaimer

This article is for informational purposes only and does not constitute legal, financial, or investment advice. Readers should verify their eligibility and seek official guidance from the Financial Conduct Authority (FCA) or their lender before taking any action related to the compensation scheme.