FCA announces proposal after lenders failed to disclose loan commission arrangements
The Financial Conduct Authority (FCA) has announced plans for a sweeping compensation scheme that could see UK motor finance lenders pay out an estimated £8.2 billion to consumers, following widespread failures to disclose key commission arrangements on car loans.
The regulator’s proposal follows a determination that many motor finance providers breached laws and regulations in force at the time, leaving borrowers in the dark about commission payments to brokers.
This lack of transparency, the FCA found, led to unfair outcomes, with some customers missing opportunities to negotiate better terms or, in some cases, paying more than necessary for their loans.
Under the proposed scheme, consumers could receive an average of £700 each. The FHA said its research showed consumer confusion over whether they could make a claim: nearly half of those aware of potential compensation but yet to claim cited uncertainty over eligibility as a barrier, while almost a quarter were unsure how much they might receive. Eighty-one percent (81%) of those considering a claim said a formal scheme would give them the confidence to proceed.
“Many motor finance lenders did not comply with the law or the rules,” said Nikhil Rathi, chief executive of the FCA.
“Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement. … That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”
The scheme would apply to motor finance agreements arranged between April 6, 2007 and November 1, 2024 where the lender paid commission to a broker. Borrowers who believe they were not properly informed about commission arrangements are encouraged to complain to their lender if they have not already done so.
The FCA said it was keen to dispel the misconception that claimants must use a claims management company or law firm. Consumers can submit complaints directly—free of charge—using resources available on the FCA’s website. Those who opt for third-party representation risk losing a significant portion of any compensation awarded.
Once the scheme is operational, lenders will proactively contact customers who have already lodged complaints. If there is no response within a month, lenders will proceed to review the case. Those who have not yet complained will be contacted within six months of the scheme’s launch and invited to opt in, with a further six months to decide.
Compensation will only be paid where the borrower was not informed about at least one of three specific commission arrangements: discretionary commission models (where brokers could increase interest rates to boost their own commission), high commission structures (35% of the total cost of credit or 10% of the loan), or exclusive arrangements between lenders and brokers. In rare cases, lenders may be able to demonstrate that non-disclosure did not result in unfairness, but in the absence of evidence, the presumption will be that borrowers were not adequately informed.
The FCA will monitor compliance with the scheme and take action against firms that fail to meet its requirements. Disputes over compensation decisions can be referred to the Financial Ombudsman Service, which will assess whether the scheme’s rules have been properly applied.
Consumers who fall outside the scheme’s criteria, or who disagree with an outcome, retain the right to pursue claims through the courts. However, the FCA warned that litigation may be slower, more costly, and less certain than the compensation scheme.
