The biggest motor finance reckoning since PPI
The UK’s motor finance industry is facing a bill of up to £11 billion as the Financial Conduct Authority (FCA) pushes ahead with a sweeping car finance scandal redress scheme.
The move, described by some analysts as the most significant compensation effort since the PPI mis-selling debacle, could see millions of customers refunded for unfair commissions built into car loans.
According to the FCA’s estimates, total compensation payments could reach £8.2 billion, with a further £2.8 billion in administrative costs. For lenders already under pressure from tightening margins and slower vehicle sales, this is a major financial and operational test.
Why lenders are feeling the squeeze
At the heart of the issue lies what the FCA calls “discretionary commission arrangements.” Under these deals, forecourt dealers could earn higher commissions by setting higher interest rates on car finance agreements. Between April 2007 and November 2023, an estimated 14.2 million finance deals-around 44% of all such agreements-were affected.
FCA Chief Executive Nikhil Rathi said:
“People weren’t told important details about their motor finance deals. That’s because firms broke the law and our rules.”
That statement leaves little room for debate: the regulator intends to act fast. The FCA car finance compensation scheme 2025 is expected to start early next year, although legal challenges from lenders are possible.
The FCA have now released guidance of what constitutes undisclosed, unfairly high commission. They define this as a commission greater than 35% of the total cost of credit and 10% of the overall loan. Lenders will be required to contact eligible customers once the FCA’s redress scheme is finalized in early 2026.
Who’s on the hook?
Big names are already counting the cost.
- Lloyds Banking Group has set aside £1.15 billion.
- Santander UK expects a hit of £295 million.
- Close Brothers-with motor finance making up about a fifth of its loan book-has earmarked £165 million.
Add in the manufacturer-owned finance arms, and the picture becomes even broader. Many in the lender redress UK landscape see echoes of the early PPI days, with analysts warning that final totals could still creep up.
How the FCA’s compensation scheme will work
Under the FCA’s proposed plan, lenders will have to contact existing complainants within three months of the scheme’s start, automatically enrolling them unless they opt out.
For consumers who haven’t yet complained, lenders will have six months to reach out and offer a review. Participation is free, and average payouts are expected to be around £700 per finance agreement.
While the Supreme Court’s August ruling offered partial relief for lenders, confirming that not every commission structure was unlawful, the FCA’s consultation makes clear that undisclosed or excessive commissions will still warrant refunds.
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Operational headaches ahead
For dealers, brokers and finance houses, this is about more than money. Managing the fallout will require systematic data tracing, customer outreach, and robust compliance frameworks to prevent further breaches.
The Finance & Leasing Association warned that “the costs are too high”, echoing a sentiment shared across the sector. Dealers who relied on discretionary models before 2021 may now face increased scrutiny, particularly when lenders seek to recover losses through tighter partnership terms.
What this means for the motor trade
The implications ripple beyond the lenders’ balance sheets. For the motor trade, this scandal could reshape finance relationships, alter dealer commission models, and push greater transparency at the point of sale.
In the short term, consumer confidence may wobble as headlines spread, potentially slowing finance applications. In the longer term, however, the industry’s shift toward clearer, fairer finance practices may actually help rebuild trust-something the FCA has been calling for since its motor finance investigation began in 2021.
Looking ahead: lessons from PPI
If history is any guide, this could take years to resolve. The PPI-style payouts process ran for more than a decade, costing lenders about £50 billion in total. But unlike PPI, the FCA appears keen to wrap up this redress programme swiftly, ideally within two years.
That’s a small comfort for lenders currently revising forecasts, compliance teams preparing communication plans, and motor finance brokers wondering how the next chapter of regulation will affect their business models.
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