Britain’s financial watchdog cut the expected cost of compensating motorists caught up in the car finance mis-selling scandal by around £2 billion as it unveiled its long-awaited final compensation scheme, although the decision is unlikely to end the controversy.
According to the Financial Conduct Authority, total remuneration and administrative costs will now be around £9.1 billion, down from previous estimates of more than £11 billion. The revised figure includes £7.5 billion in direct payouts to consumers and £1.6 billion in operating costs for lenders.
The reduction was largely achieved by tightening the eligibility criteria. Some 12.1 million financing contracts signed between 2007 and 2024 now fall within the scope of the program, compared to 14.2 million under the regulator’s initial proposals last fall.
Despite the lower overall bill, the FCA expects the average compensation payment to increase. Eligible consumers are forecast to receive around £829 per contract, up from a previous estimate of around £700.
The regulator expects around 75 percent of eligible customers to file a claim. However, this assumption could be tested depending on how straightforward the process turns out to be in practice.
At the heart of the scandal are commission arrangements between lenders and car dealers that were not properly disclosed to borrowers, potentially driving up the cost of borrowing. The FCA banned certain types of commission structures in 2021, but increasing complaints led to a wider investigation being launched in 2024.
While the reduced regulation provides some relief to lenders, the reaction across the industry has been mixed. Many firms had pushed hard for changes, arguing that the original proposals were disproportionate and contradicted a Supreme Court ruling last year that was broadly in favor of lenders.
Major financial institutions such as Lloyds Banking Group, which has already set aside almost £2 billion, and Close Brothers continue to face significant financial impacts. Close Brothers shares fell after the announcement, reflecting investor concerns about its exposure.
There is also growing expectation that the scheme could be challenged in court, either by lenders seeking to further reduce their liabilities or by consumer groups who argue that the level of compensation remains inadequate.
Nikhil Rathi called on the industry to support the program, arguing that a coordinated approach would deliver faster results for consumers and help restore confidence in the market.
“An industry-wide system is the most efficient way to compensate affected consumers while supporting the continued availability of competitively priced vehicle financing,” he said.
The FCA has chosen to split the redress scheme into two parts, one for agreements from 2007 to 2014 and another for 2014 to 2024. While this approach may help to process claims more quickly, legal experts warn that it could lead to additional complexity and confusion for consumers.
The split also reflects the regulator’s attempt to control legal risks, particularly related to older claims, which have been a major point of contention for lenders.
However, some analysts believe that this strategy may not prevent challenges. The gap between the FCA’s average payout estimate and the higher figures suggested by claims firms, often closer to £1,500 per case, could prompt consumers to seek compensation in court instead.
Even in its revised form, the system poses a major logistical and financial challenge for the industry. Lenders must identify affected customers based on millions of historical contracts, calculate appropriate compensation and process claims efficiently.
Richard Pinch, of consultancy Broadstone, said the scheme would still place a significant burden on companies in terms of both cost and operational complexity.
“This is not just about the level of compensation, but also the difficulty of managing it over decades of lending,” he said.
Consumer advocates have criticized the final rule for not providing complete legal protection. Some argue that stricter eligibility criteria could exclude vulnerable borrowers or reduce compensation for those most affected.
Law firms are already preparing to bring claims outside the FCA framework, raising the prospect of protracted litigation and continued uncertainty for both lenders and clients.
The completion of the compensation scheme represents a pivotal moment for the UK car finance sector, which is now facing one of the largest claims for damages since the PPI scandal.
For regulators, the challenge has been to balance fair outcomes for consumers with the need to avoid destabilizing the financial system. For lenders, the focus shifts to addressing the financial damage and restoring trust.
For consumers, the key question remains whether the system will provide timely and meaningful compensation or whether the fight for redress in court will continue for years.
