Victims of car finance mis-selling will likely get less than £950 per deal under a compensation scheme proposed by the financial regulator, with the first payouts expected next year.
The Supreme Court ruled on Friday that hidden commissions from lenders to dealers on car loans were not unlawful, meaning millions of motorists will not be able to claim.
However, the judgement left open the possibility of compensation claims for particularly large commissions which the Supreme Court said were unfair.
Following the ruling, the Financial Conduct Authority (FCA) has said it will consult on running a payout scheme – estimated to cost between £9bn and £18bn.
The FCA said it was “hard to estimate precisely at this stage the total cost to industry of the scheme”, but it is understood that millions could be eligible.
The industry is expected to cover the full costs of any potential compensation scheme, including any administrative costs.
Those who have already complained do not need to do anything, the regulator said, advising those who have yet to complain to contact their car loan provider rather than using a claims management company.
It added that it “anticipate[s] requiring firms as far as possible to make customers aware they may be eligible and what they may need to do” and that claims “should cover agreements dating back to 2007”.
However, the Finance & Leasing Association has said it is concerned “about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information”.
The FCA said it will start its consultation on who should be eligible for compensation and how much they should get in October, adding that the Supreme Court ruling provided “clarity”.
On Friday, the Supreme Court reversed earlier court rulings which said that hidden commissions on car loans were unlawful.
The case was brought by two specialist lenders, Close Brothers and South Africa’s FirstRand, in an attempt to challenge the three consumers who collectively won a Court of Appeal case in October.
However, the Supreme Court ruled that if commission is extremely high, such as in the case brought by Marcus Johnson, where the commission paid to the dealer was 55% of the total charge or credit including interest and fees – that this was a “powerful indication” the relationship between Mr Johnson and lender FirstRand was unfair.
The Supreme Court awarded Mr Johnson the amount of a commission plus interest.
The FCA said Friday’s judgement “helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts”.
FCA chief executive Nikhil Rathi said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.”
He said consumers did not need to use a claims management company or law firm in order to make a claim, adding: “If you do, it will cost you a significant chunk of any money you get.”
The issue of car finance mis-selling goes back to 2021, when the FCA banned deals in which the dealer received a commission from the lender based on the interest rate charged to the customer.
These were known as discretionary commission arrangements (DCAs).
The FCA said DCAs provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.
Since January, it has been considering whether compensation should be paid to people with these deals before 2021.
Some 80,000 open cases on this issue were effectively on hold until Friday’s Supreme Court ruling.
Following the ruling, the FCA said the compensation scheme should cover DCAs “if they were not properly disclosed” but also cases like Mr Johnson’s, in which there was no DCA but the commission was too high.
It added that the amount of money victims receive will depend on the “degree of harm suffered by the consumer and the need to ensure consumers continue to be able to access affordable loans for motor vehicles”.
The vast majority of new cars, and many second-hand ones, are bought with finance agreements, with the FCA saying it is analysing the potential market impact of any redress scheme.
In February, Chancellor Rachel Reeves’ attempt to intervene in the Supreme Court case over concerns it had about the rulings potential impact on the market was blocked.
The FCA said on Sunday that it expects “a healthy finance market for new and used cars to continue notwithstanding any redress scheme we propose”.