Millions of drivers set for £829 car finance payouts face being ‘short-changed’ to save lenders billions, court told

MILLIONS of motorists expecting compensation for mis-sold car loans could be short-changed under a City watchdog’s redress scheme, a consumer group has told a court. Consumer Voice is challenging the Financial Conduct Authority’s (FCA) £9.1billion compensation plan, claiming regulators put lenders’ costs ahead of protecting drivers. An estimated 12.1million car finance agreements taken out between 2007 and 2024 are eligible for redress under the scheme, with payouts averaging £829 each. But Consumer Voice, represented by solicitors Courmacs Legal, says the FCA set compensation interest rates too low to properly cover what borrowers lost out on. Sign up for the Money newsletter Thank you! Court documents allege the watchdog picked a rate that “knowingly set the floor below the actual borrowing costs of most consumers”. The FCA has proposed paying compensatory interest at 3%, based on the Bank of England‘s average base rate plus one percentage point. Legal filings claim the regulator had also considered adding 8% to the base rate instead, but rejected this partly over fears it would hit lenders too hard financially. The court papers state the FCA “made firm impact and operational simplicity the dominant consideration in its decision-making”. They add: “Whilst the FCA recognised that an 8% rate would directly address consumer concerns, it rejected this on the basis that it ‘would significantly increase total redress costs for firms’, the risk of challenge by lenders and market impacts.” The filing goes on to claim the watchdog’s own data showed unsecured personal loan rates were above 3% for almost the entire period covered by the scheme. Most read in Money It states: “The FCA’s own data showed that unsecured personal loan rates exceeded 3% for almost the entire scheme period, and that many consumers – particularly those with weaker credit profiles – would have borrowed at materially higher rates.” The court documents also reveal concerns raised by Peter Andrews, a former FCA chief economist who sat on the regulator’s cost benefit analysis panel, shortly before the scheme’s final details were published. He is quoted as saying: “The fact that one scheme may be cheaper than another does not seem to be an adequate basis for a decision to favour the cheaper scheme when the main objective of the scheme must be consumer protection.” The FCA has said it will defend the scheme as the fairest way to resolve the long-running scandal, insisting it is “fair to consumers and proportionate for firms”. It has argued the legal challenges have created uncertainty across the motor finance industry, delaying payouts that were originally due to begin this year. The regulator has also tried to have Consumer Voice’s case thrown out, questioning how the group’s legal action is being funded and its relationship with its solicitors. Consumer Voice has hit back, insisting it has “no commercial interest in the outcome of this challenge” and believes it is acting “in the interests of consumers who stand to lose billions in redress under the scheme as it presently stands”. The FCA is also facing separate legal challenges from the finance arms of carmakers Volkswagen and Mercedes-Benz, as well as the car finance division of French bank Credit Agricole. As a result, the FCA has suspended the compensation scheme. If it is upheld and the judgment is not appealed, the regulator expects payments to begin in 2027. A spokeswoman for the FCA said: “Our scheme is the quickest, fairest and most efficient way to put £7.5billion back in consumers’ pockets and we are defending it robustly. “It is unfortunate the challenges have delayed payouts for consumers that were due to begin this year, especially as household bills come under greater pressure. “We will respond fully to these challenges in court.” Q&A Who is eligible for the cash? You are likely eligible if you took out a motor finance loan between April 6, 2007, and November 1, 2024, and weren’t told about certain commission deals. This includes “discretionary commission arrangements” where dealers hiked interest rates to get a bigger kickback, or high commission deals where the payout was at least 39% of the credit cost. Loans with 0% APR or very low interest are generally excluded. However, the final eligibility rules could change because the compensation scheme is facing legal challenges. How much can I get? The FCA says the average payout is around £829 per agreement. For most, this is calculated by looking at the commission paid and the “estimated loss” from the inflated interest rate. Those with older loans (pre-2014) may get slightly more as losses were higher then. In about 1 in 3 cases, payouts will be capped to make sure you aren’t “put back in a better position” than if you’d been treated fairly in the first place. However, payment amounts and calculations could change if the FCA is required to revise the scheme. Do I need to make a claim? If you haven’t complained yet, you don’t necessarily need to rush. Lenders must contact you if they think you are “likely to be owed money”. While the legal challenges are ongoing, lenders do not need to calculate or pay compensation, although they can continue processing complaints as far as possible. If you aren’t contacted, you have until August 31, 2027, to put in a claim. When will I be paid? Payments are now unlikely to begin before 2027. Legal challenges are due to be heard in December or February, with a judgement expected in the following months. If the scheme is upheld and there is no appeal, the FCA expects payments to start in 2027. Further evidence, appeals or another consultation could push compensation back until 2028 or later. If the scheme is overturned, lenders may instead have to deal with complaints individually. They would normally have eight weeks to respond before cases could be referred to the Financial Ombudsman Service. Should I use a claims firm? The FCA says there is “no need” to use a claims management company or a law firm. The scheme is designed to be free and easy to use. If you use a firm, they could take a massive chunk of your cash – potentially over 30% of your total payout. Comment now