FCA cuts car finance liability by £2bn but raises average payments

The UK’s financial watchdog has slashed the expected cost of compensating motorists caught up in illegal car sales by around £2 billion, as it unveiled its final long-awaited reform plan, although the decision is unlikely to end the dispute.

The Financial Conduct Authority said total compensation and administration costs would now reach £9.1 billion, down from earlier estimates of more than £11 billion. The revised figure includes £7.5 billion in direct payments to consumers and £1.6 billion in operating costs for lenders.

The reduction was largely achieved by tightening eligibility criteria. An estimated 12.1 million financial deals signed between 2007 and 2024 would now fall under the program, compared to 14.2 million under the regulator’s initial proposals last fall.

Despite the lower overall bill, the FCA expects average compensation payments to rise. Eligible buyers are expected to earn around £829 per deal, up from the previous average of around £700.

The regulator expects that about 75 percent of eligible customers will file a claim, although this assumption may be tested depending on how specific the process is 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 loans. The FCA banned certain types of commission structures in 2021, but growing complaints prompted a wider investigation launched in 2024.

While the reverse plan provided relief to lenders, the reaction across the industry was mixed. Many firms have strongly demanded changes, saying the original proposals were disproportionate and inconsistent with last year’s Supreme Court ruling that largely favored lenders.

Major institutions including Lloyds Banking Group, which has set aside almost £2 billion, and Close Brothers are still expected to face the biggest financial impact. Shares in Close Brothers fell following the announcement, reflecting investor concern over the disclosure.

There is also growing expectation that the system could be challenged in the courts, either by lenders seeking to reduce debt further or by consumer groups arguing that compensation levels remain inadequate.

Nikhil Rathi appealed to the industry to support the initiative, saying that an integrated approach would bring faster results to consumers and help restore confidence in the market.

“The industry-wide program is the most effective way to compensate affected consumers while supporting the continued availability of competitively priced vehicle financing,” he said.

The FCA has chosen to divide the maintenance program into two parts, one covering the agreements from 2007 to 2014 and the other from 2014 to 2024. While this approach can help process claims faster, legal experts warn that it could introduce more complexity and confusion for consumers.

The split also reflects the regulator’s attempt to manage legal risk, particularly in relation to older claims, which have been highly controversial for lenders.

However, some analysts suggest that this strategy may not prevent challenges. The gap between the FCA’s average payout rate and the maximum figures suggested by claims firms, which are often close to £1,500 per case, can encourage consumers to pursue redress through the courts instead.

Even in its revised form, the program poses a major operational and financial challenge to the industry. Lenders will need to identify affected customers from millions of historical contracts, calculate appropriate compensation and process claims appropriately.

Richard Pinch of Consultancy Broadstone said the scheme would still pose a major challenge to firms, both in terms of cost and operational complexity.

“This is not only about the amount of compensation, but also the difficulty of managing it for decades of lending,” he said.

Consumer advocates criticized the final plan as falling short of delivering a comprehensive overhaul. Others argue that stricter eligibility criteria may exclude vulnerable borrowers or reduce compensation for those most affected.

Law firms are already preparing to pursue claims outside the FCA framework, raising the prospect of protracted litigation and further uncertainty for both lenders and customers.

The completion of the restructuring plan marks a significant moment for the UK’s car finance sector, which is now facing one of the biggest fines since the PPI scandal emerged.

For regulators, the challenge has been balancing fair outcomes for consumers with the need to avoid destabilizing the financial system. For lenders, the focus is shifting to managing financial impact and rebuilding trust.

For consumers, the key question remains whether this plan will deliver timely and meaningful compensation, or whether the battle for redress will continue in the courts for years to come.