Car Finance Compensation 2025: What You Need to Know
Overview
The Financial Conduct Authority (FCA) has launched a landmark consultation that could see millions of UK motorists compensated for car finance mis-selling. This marks the beginning of a formal process to determine how a national redress scheme will operate, who will be eligible, and how much compensation will be paid.
The FCA estimates that up to 14 million car finance agreements made between April 2007 and November 2024 could fall within scope. The proposed average payout is around £700 per agreement, with an overall compensation pool of about £8.2 billion. This follows a series of legal and regulatory reviews that found widespread failures in how car finance was sold and structured.
At the heart of the issue are commission-based incentives between lenders and car dealers that were not properly disclosed to consumers. These arrangements often meant customers paid higher interest rates than they should have, without understanding that the dealer’s commission was linked to the rate they were charged.
The FCA’s proposed scheme will be free for consumers, with no need for claims management companies or legal representation. It is designed to ensure consistent and fair outcomes for all customers, rather than leaving individual drivers to navigate complex legal processes.
The consultation remains open until November 2025, with final rules and initial payments expected in early 2026. The FCA has described the initiative as a way to “draw a line under years of uncertainty” in the motor finance market, while protecting consumers and restoring confidence in the system.
Why This Is Happening
The FCA’s redress proposal follows years of concern about unfair practices in the car finance industry, where commission-based sales models often incentivised dealers to raise interest rates.
Under many pre-2021 agreements, dealers could set or influence the interest rate on a customer’s car loan. The higher the rate, the more commission they earned. This system, known as a Discretionary Commission Arrangement (DCA), was rarely explained to customers, meaning they paid more than necessary without informed consent.
These practices were formally banned in January 2021, but by then millions of deals had already been affected. Investigations by the FCA, the Financial Ombudsman Service (FOS), and several court rulings revealed that many customers were overcharged and that lenders had not always acted transparently.
In 2024, the situation escalated when key High Court and Supreme Court judgments clarified that certain commission models breached principles of fairness and consumer protection. These legal outcomes gave the FCA both the legal and moral authority to intervene.
The regulator’s objective now is twofold. First, to ensure consistent redress for consumers who were financially disadvantaged by hidden or excessive commissions. Second, to prevent a repeat of the mass litigation seen in previous scandals such as Payment Protection Insurance (PPI), where inconsistent processes caused confusion and delays.
According to the FCA’s analysis, more than 40% of all car finance deals since 2007 may have involved commission-linked pricing. Many of these arrangements were structured without clear disclosure to the borrower, creating a systemic issue that individual complaints cannot resolve.
By introducing a structured redress framework, the FCA aims to balance consumer fairness with industry stability. The scheme is intended to deliver compensation where it is deserved while giving lenders a defined and transparent process to resolve cases efficiently.
What Is In Scope
The FCA’s consultation covers three main types of car finance mis-selling across Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements. Personal Contract Hire (leasing) is excluded.
1. Discretionary Commission Arrangements (DCAs)
Dealers could increase a customer’s interest rate to earn higher commission. Customers were rarely told this link existed, meaning many overpaid compared to the lowest available rate. This practice was banned in January 2021 and is believed to affect around 6 million agreements.
2. Tied or Restricted Dealer Panels
Some dealerships told customers they would compare lenders to find the best rate but in reality selected from a limited group offering the highest dealer commissions. This created a conflict of interest and led to inflated costs for customers. An estimated 5 million agreements could fall under this category.
3. Unfairly High Commission
In some cases, the commission itself was excessively high, more than 35% of the total cost of credit and over 10% of the loan amount. The FCA is reviewing whether the commission size alone made some agreements unfair. Roughly 3 million agreements may be affected.
Together, these three categories account for the estimated 14 million finance agreements likely to be reviewed under the consultation.
Who Might Qualify
You may qualify if you used a PCP or HP finance agreement between April 2007 and November 2024 and were not clearly informed about how dealer commissions affected your interest rate.
Customers are most likely to be eligible if they:
Took out car finance during that period and paid interest affected by a dealer’s commission arrangement.
Were told the dealer would find the “best deal” but later found out only specific lenders were used.
Paid an unusually high commission relative to the size of the loan.
You are less likely to qualify if your deal was Personal Contract Hire (leasing), a 0% interest agreement, or was taken out after January 2021. Agreements that have already received full redress through the Financial Ombudsman Service or the courts are also excluded.
How Compensation Could Be Calculated
The FCA aims to create a clear and consistent formula for redress so that similar cases receive similar outcomes. Compensation is expected to include a refund of excess interest or unfair commission, plus simple interest based on the Bank of England base rate plus 1%, which equates to around 3% per year.
The regulator expects most payouts to be below £950 per agreement, with an average of about £700, though individual amounts will vary depending on the details of each case.
Timelines and Next Steps
The FCA’s consultation is open until November 2025, and the final rules are expected in early 2026 when the redress scheme will officially begin.
Here’s what to expect:
October to November 2025: Consultation period open for feedback.
Early 2026: FCA finalises the redress scheme.
Mid-2026 onwards:
Customers who have already complained will be prioritised for review.
Lenders will begin contacting eligible customers within six months of launch.
Those not contacted can submit a claim within 12 months of the scheme’s start date.
What You Should Do Now
If you think you might be affected, now is a good time to prepare. Start by gathering your car finance documents such as agreements, statements, or correspondence with your lender. If you no longer have them, check your credit report for the lender’s name and approximate dates.
The FCA recommends submitting a free complaint directly to your lender if you believe you overpaid or were not told about commission arrangements. This helps log your case early and ensures your information is recorded before the redress scheme begins.
You can find reliable free templates for complaints on websites such as MoneySavingExpert, the Financial Ombudsman Service, and the FCA’s official site. These guides explain the process in straightforward language.
Avoid using claims management companies, which often charge up to 30% of your payout. The FCA’s redress scheme will be completely free to access.
If You’ve Already Used a Claims Management Company
If you have already signed up with a claims management company (CMC), review your agreement carefully. Some CMCs include clauses that entitle them to a share of your compensation even if they do little work once the official FCA scheme begins.
You can:
Stay with the CMC if you are comfortable paying their fee once redress is awarded.
Withdraw or cancel your agreement if you prefer to handle your claim yourself. Some firms may charge a cancellation fee.
Contact Citizens Advice or MoneyHelper if you are unsure of your rights or think the CMC has acted unfairly.
The FCA has already taken action against misleading advertising by claims firms and has confirmed that the official redress process will be free and straightforward.
Useful Free Resources
You can handle the process yourself using these trusted tools:
MoneySavingExpert – Car Finance Reclaim Guide and Free Tool: step-by-step guide with complaint templates.
Financial Ombudsman Service (FOS): independent body for escalating rejected complaints.
Citizens Advice: impartial help with consumer rights and complaint letters.
Financial Conduct Authority (FCA): official updates, timelines, and consultation documents.
Frequently Asked Questions
Do I need to complain now or wait?
You can do either. Complaining now helps lenders locate your records early, but lenders will contact eligible customers once the scheme begins.
Will complaining affect my credit rating?
No. The FCA has confirmed that firms cannot penalise customers for submitting complaints.
What if my lender cannot find my records?
Provide as much information as possible, such as your car registration, dates, and previous addresses, to help them locate your agreement.
Can I go to court instead?
Yes, but most consumers are expected to use the FCA scheme as it will be simpler, faster, and free of legal costs.
Industry and Consumer Reaction
Consumer groups have welcomed the FCA’s proposal, calling it an important step towards fairness in motor finance. Martin Lewis of MoneySavingExpert described it as “long overdue,” while the Finance and Leasing Association has questioned the FCA’s estimates, arguing that compensation figures may be overstated.
The FCA maintains that its approach is fair, consistent with court rulings, and designed to restore trust in the car finance industry.
Final Thoughts
This consultation marks one of the most significant consumer protection initiatives since the PPI refunds. While the average payout may appear modest, it represents an opportunity to resolve years of unclear and unfair car finance practices.
If you believe your car finance deal involved one of the practices in scope, review the materials in the Useful Free Resources section, gather your documents, and consider submitting a free complaint to your lender. Staying informed now will ensure you are ready when the scheme launches in 2026.
What Do You Think?
The FCA’s proposal could become one of the largest consumer compensation efforts in UK financial history. But is it fair enough?
Do you think the £700 average payout properly reflects the harm caused by years of hidden commissions? Would you prefer to submit a complaint now or wait for lenders to contact you once the scheme is live?
Perhaps you have already checked whether your agreement involved discretionary or unfair commission, or you are still unsure how to start.
Share your views in the comments. Your experience could help others decide how to act and shape what a fair outcome should look like for millions of people who financed their cars between 2007 and 2024.
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