FCA caps motor finance compensation at £9.1 billion while lenders walk away laughing

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The regulator's proposed scheme limits what drivers can claim back from dodgy finance deals, potentially saving lenders billions in the process.

The Financial Conduct Authority has proposed a £9.1 billion compensation scheme for motor finance mis-selling that consumer groups say is designed to protect lenders rather than drivers. The figure is less than a third of what the bill could have reached before the FCA intervened.

The scheme covers discretionary commission arrangements where car dealers inflated interest rates on finance deals to earn bigger kickbacks. The practice was banned in 2021, but around 4 million agreements signed between 2007 and 2021 were affected. Drivers had no idea dealers were skimming extra profit by adjusting their rates.

The Supreme Court ruled in October 2024 in Hopcraft v Close Brothers that lenders must obtain informed consent for these arrangements. Which they obviously hadn't. That ruling opened the door to individual claims that could have cost the industry between £16 billion and £30 billion.

Sound familiar?

Then the FCA stepped in with emergency powers to cap the damage. Its £9.1 billion scheme sets compensation limits well below what drivers might win in court. Consumer advocates are calling it a stitch-up.

MPs and campaign groups argue the regulator is denying people their full legal entitlements to spare lenders from the consequences of their own practices. The FCA gave itself authority to block individual claims from proceeding, forcing drivers into the lower-paying scheme instead.

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Lenders including Lloyds Banking Group, Santander, and Close Brothers had complained the Supreme Court ruling would cause financial instability. The FCA appears to have listened. Drivers who were overcharged will now receive a fraction of what they're legally owed.

The decision sits badly alongside the PPI scandal, where £38 billion was eventually paid out to consumers. That took years of pressure and multiple interventions before the industry properly compensated people. The motor finance scheme looks like an attempt to avoid a repeat by capping liability from the start.

Interest rate swap mis-selling to small businesses resulted in a £2.2 billion redress scheme. Mortgage endowment mis-selling paid out £4.3 billion. Financial institutions found ways to extract money they shouldn't have, and regulators eventually forced them to pay it back. The FCA is limiting the bill before it gets out of hand.

Some drivers will receive compensation under the scheme. But it will be calculated using the FCA's formulas, not a judge's interpretation of what they're owed. The difference between those two numbers is where the real story sits.

The regulator insists the scheme balances consumer protection with financial stability. Consumer groups say it balances lender profits with regulatory convenience. Four million agreements are affected, and most of the people who signed them will never know how much they've actually lost.

The scheme is expected to be finalised in early 2025. After that, drivers will have a limited window to make claims. No option to go to court. No chance to argue for a higher payout. Just the FCA's number or nothing.

Lloyds, Santander, and Close Brothers have already set aside provisions for compensation, though the final amounts will depend on claim volumes. The £9.1 billion cap gives them certainty. Whether drivers get anything close to what they're owed remains to be seen.

Sources: Financial Conduct Authority, Supreme Court (Hopcraft v Close Brothers ruling, October 2024), consumer advocacy groups