UK's Financial Watchdog Reveals Potential £18bn Redress Scheme for Mis-Sold Car Finance Drivers

Strategic Insights -

A proposed redress scheme for drivers who were mis-sold car finance could cost up to £18bn, according to the UK's financial watchdog, the Financial Conduct Authority (FCA). The scheme aims to compensate motorists who unknowingly paid inflated borrowing costs due to undisclosed commission payments made to car dealers. The proposed scheme will cover finance agreements dating back to 2007 and follows a Supreme Court ruling that found certain lenders acted unlawfully by failing to disclose large commissions.

Key Takeaways:

  • The proposed redress scheme could cost up to £18bn, making it one of the largest consumer redress schemes in UK history.
  • The scheme will cover finance agreements dating back to 2007, with compensation amounts depending on the financial harm caused.
  • The FCA will consult on the most appropriate method for calculating redress, with full repayment of commission expected to be the maximum.
  • Interest payments will probably be included as part of the compensation, calculated at an average base rate plus 1 per cent, which equates to roughly 3 per cent simple interest per year.
  • The scheme will examine how to ensure affected consumers are informed, with options being considered for opt-in versus opt-out approaches.
  • The FCA will open its consultation in early October and will run for six weeks, aiming to finalise the rules by early 2026.
  • Alex Neill, co-founder of the consumer rights group Consumer Voice, welcomed the move but urged caution, stating that the "devil will be in the details."
  • The largest consumer payout in the UK was the £40bn compensation awarded to customers who were mis-sold payment protection insurance, which had largely been paid by 2019.

Statistics:

  • £18bn: The potential cost of the proposed redress scheme.
  • £9bn - £18bn: The estimated range of payouts.
  • £40bn: The largest consumer payout in the UK, awarded to customers who were mis-sold payment protection insurance.
  • 55%: The size of the commission in relation to the total cost of credit that one dealer received.
  • 3%: The simple interest rate proposed for calculating interest payments.
  • 2007: The year from which finance agreements will be covered by the proposed scheme.
  • 2025: The current deadline for firms to issue final responses to relevant complaints.
  • 2026: The year by which the FCA aims to finalise the rules and implement the redress scheme.

Sources:

  • Financial Conduct Authority (FCA)
  • Consumer Voice