Lenders who sold rip-off loans to millions of motorists were last night told to crack on with paying back billions of pounds as the City watchdog finalised a compensation scheme.
The announcement by the Financial Conduct Authority (FCA) will see 12.1 million mis-sold motor finance deals trigger an average £829 payout each.
That is fewer than the 14.2 million predicted when the FCA first outlined plans for the scheme. But the average amount of compensation is larger than the £695 initially estimated.
And FCA chief executive Nikhil Rathi said lenders should start paying as soon as possible.
‘It’s time now for lenders to put right the fact they’ve broken the law and get the compensation to their customers and rebuild trust for the future,’ he said. ‘There’s nothing stopping lenders moving tomorrow if they wanted to now they’ve seen the rules of the scheme.’
The FCA expects millions of customers to be compensated this year and most of the rest by the end of 2027.
The scandal centres on commissions paid by lenders to car dealers
Motorists are getting money back because of the way car dealers were given commissions by lenders to sell loans to customers – and in some cases were given juicier payouts for flogging pricier finance packages. It covers a period from 2007 to 2024.
But lenders have grumbled about the set-up of the scheme and claimed that the FCA does not have the right to make them pay compensation for car finance deals that go back that far.
The FCA has split the scheme into two parts, one covering 2007 to 2014, another for 2014 to 2024. That is because of the potential legal challenge to the earlier part – and to ensure that the later part of the scheme can still go ahead even if that does happen.
Under the scheme announced yesterday, £7.5 billion will be paid out in compensation.
Changes to the initial proposals have been made to ensure that consumers do not end up better off than they would have been even if they were treated fairly.
The FCA has also decided not to cover high-value loans such as those for luxury vehicles. But the average payout has increased for older agreements and a minimum 3 per cent per year interest rate for compensation put in place.
However, Kevin Durkin, director of HD Law, a firm behind a key legal challenge that helped lead to the scheme, said: ‘We’re extremely disappointed.
'This falls way short of what consumers should be entitled to in order to receive fair compensation. When the Supreme Court decision was released, there was talk of an industry claim value overall of £30 billion.’
Rocio Concha, of consumer group Which?, said: ‘Consumers have faced a lengthy and frustrating wait for a resolution to the car finance mis-selling scandal, so this marks a major milestone on the road to redress.
'Firms must now commit to following the process set out by the FCA and act swiftly to ensure customers receive the money they are rightfully owed.’