Car finance compensation payouts unlikely before 2027 as legal challenges stall £9bn redress scheme

Millions of motorists waiting for compensation over mis-sold car finance face a fresh delay, with the Financial Conduct Authority warning that payouts under its £9.1 billion redress scheme are now unlikely to begin before 2027.

The scheme, which covers an estimated 12.1 million eligible car finance agreements with an average payout of £829, was due to start paying out this year. It has instead been put on hold while the courts consider legal challenges brought by the finance arms of leading carmakers and a consumer group.

In correspondence with the Treasury select committee, Nikhil Rathi, chief executive of the FCA, said it was unprecedented that an agreement to recompense complainants should have been paused for two years. “Any payouts are now increasingly unlikely before 2027,” he told committee chair Dame Meg Hillier.

The compensation relates to so-called discretionary commission arrangements, widely known as “hidden” commission, under which dealers could set the interest rate on a customer’s loan, pocketing a bigger commission the higher the rate climbed. The FCA concluded the practice meant motorists did not get a fair deal when financing their cars, and banned it in 2021.

The financial services arms of Volkswagen and Mercedes-Benz, the car finance division of French bank Crédit Agricole, and Consumer Voice, a group representing consumers, are asking the courts to quash the scheme, arguing its rules are unlawful. No UK bank has chosen to challenge it.

“The final scheme is fair to consumers and proportionate for firms and, while not all agree with every element, lenders representing most of the market and their trade bodies chose not to challenge,” Rathi wrote. “Several have said publicly that, despite reservations, the scheme offers the quickest and most effective route to certainty for both customers and investors.”

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He added: “It is disappointing that four commercial parties proceeded with challenges.”

The dispute is the latest twist in a saga that has already taken in the Court of Appeal and a Supreme Court ruling that blocked billions in car finance payouts last year, after the government was barred from intervening in the landmark commission battle.

The bill for the regulator is mounting too. Developing the scheme has cost the FCA, a body funded by fees charged to the firms it regulates, £20.5 million over more than two years, and it estimates the legal challenges will add a further £2.7 million. Around 80 staff are currently working on motor finance.

There is a glimmer of hope for those left waiting. Sarah Pritchard, the FCA’s deputy chief executive, told MPs the watchdog was exploring ways to pay some consumers early. “Consumers have been waiting a very long time to be compensated and, one way or the other, they need to be compensated,” she said.

The scandal is a reminder for anyone financing their next car, electric or otherwise, to scrutinise the small print before signing. With most new EVs bought on finance, understanding how deposits shape an affordable PCP deal has rarely mattered more.

Drivers who believe they were affected can complain directly to their lender free of charge, the FCA says, without using a claims management company, which may take more than 30 per cent of any compensation.