FCA ordered to partly suspend car finance compensation scheme

The UK’s financial watchdog has been forced to partly suspend its £9.1bn car finance compensation scheme, delaying payouts for millions of motorists.

The Financial Conduct Authority had expected the scheme would start paying out £830 on average this year to those affected by the motor finance scandal, in which drivers were overcharged for loans as a result of commission payments between lenders and car dealers between 2007 and 2024.

A court, however, has ordered the regulator to suspend parts of the compensation scheme until a hearing in December or February next year, when it will decide on challenges by three lenders and a consumer group: Volkswagen Financial Services, Mercedes-Benz Financial Services, Crédit Agricole Auto Finance and Consumer Voice.

A judgment is expected in the months after the hearing, the FCA said.

It means that some of Britain’s biggest lenders, who have already set aside billions of pounds to pay out on claims, will not need to calculate or pay compensation to people owed money under the scheme until the legal process concludes.

The FCA said it would need to decide what to do next if the court decided to overturn the scheme.

It said in a statement: “We want to secure fair compensation for consumers as quickly as possible. So, if the scheme is overturned, we may instead tell lenders to resolve complaints individually under the usual complaints process.

“Lenders would need to respond within eight weeks, and you could take your complaint to the Financial Ombudsman Service if you think you haven’t been treated fairly.”

The regulator’s boss, Nikhil Rathi, told MPs on the Treasury committee last month that if the scheme were to be shot down, it could cost lenders an additional £6bn and take three years to resolve claims through a complaints-led approach.

The FCA initially introduced the scheme in March to compensate motorists who were treated ⁠unfairly, and estimated that payouts could total £7.5bn, covering about 12.1m car loans, with a further £1.6bn in costs.

The watchdog also told the Treasury committee in June it would take a near-£3m hit from being dragged through the courts. The FCA’s deputy chief executive, Sarah Pritchard, said this could result in financial trade-offs, with the watchdog – which is funded by the companies it supervises – having to “pivot resources” internally.

Mis-sold car finance has been described as the worst consumer finance scandal since PPI. Millions of people affected by discretionary commissions that inflated the cost of car financing. The practice, which was banned in 2021, allowed car dealers to claim higher commissions if they put customers on loans that earned higher interest rates for the lender.

Millions of people were expecting to be compensated this year, and the FCA had expected that “most of the rest” would be by 2027. It said, however, that if it were to seek views on a revised scheme, which could also face further legal challenge, compensation could be delayed “until 2028 or beyond”.