UK Car Finance Mis-Selling: FCA Proposes Redress Scheme Amid Industry Concerns

The UK's Financial Conduct Authority (FCA) plans to launch a consultation in October on a redress scheme for car finance mis-selling, estimated to cost the industry £9-18bn. The scheme aims to compensate victims of mis-selling, but industry trade body's CEO, Paul Hadrill, calls it "impractical" due to lack of customer and lender data on contracts dating back to 2007. He warns that the scheme's cost could lead to fewer car financing plans being offered in the future, making borrowing more expensive for consumers.

The UK's Financial Conduct Authority (FCA) is set to launch a consultation in October on a redress scheme for car finance mis-selling, with an estimated cost of £9-18 billion. The scheme aims to compensate victims of mis-selling, but industry trade body's CEO, Paul Hadrill, has raised concerns about its practicality due to the lack of customer and lender data on contracts dating back to 2007. Hadrill warns that the scheme's cost could lead to fewer car financing plans being offered in the future, potentially making borrowing more expensive for consumers [1].

The FCA's proposal comes after the UK Supreme Court's ruling on Friday, which overturned an earlier court decision and reduced the potential cost of compensation claims. The court ruled that hidden commissions from lenders to dealers on car loans were not unlawful, but left open the possibility of compensation claims for particularly large commissions deemed unfair [2].

The FCA estimates that the total cost of the redress scheme could be between £9 billion and £18 billion, but cautions that this is an indicative range and could change. The consultation will look at how firms should assess whether the relationship between the lender and borrower was unfair, and how interest is calculated on compensation [3].

Lenders, including Lloyds Banking Group and Close Brothers, have already set aside nearly £2 billion between them to cover potential motor finance compensation claims. The FCA has advised firms to refresh their estimates of liabilities, increase provisions where necessary, and keep markets informed [4].

The consultation will also consider which types of commission arrangements should be included in the scheme and whether customers should opt in or be automatically involved unless they opt out. The regulator expects people to start receiving compensation in 2026 [4].

References:
[1] Reuters. (2025). Lloyds keeps motor finance provision under review after Supreme Court ruling. Retrieved from https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3TW04B:0-lloyds-keeps-motor-finance-provision-under-review-after-supreme-court-ruling/
[2] BBC News. (2025). Compensation scheme for drivers over car loan mis-selling could cost £18bn. Retrieved from https://www.bbc.com/news/articles/cgjy29zql25o
[3] Bloomberg. (2025). UK’s Supreme Court boosts lenders in motor finance probe. Retrieved from https://www.bloomberg.com/news/live-blog/2025-08-04/ftse-100-live-pound-usd-trump-tariffs-oil-prices-gilt-what-s-moving-uk-markets-right-now-markets-today
[4] Business Times. (2025). UK's FCA proposes £9-18bn redress scheme for motor finance claims. Retrieved from https://www.businesstimes.com.sg/international/uks-fca-proposes-ps9-billion-ps18-billion-redress-scheme-motor-finance-claims