City watchdog faces legal action over £9.1bn car finance compensation scheme

A consumer group is preparing a legal challenge against the City watchdog over concerns that its car finance redress scheme will short-change millions of people.

Consumer Voice said it was taking the “unprecedented” step of applying for a legal review of how the Financial Conduct Authority’s £9.1 billion compensation scheme is calculated, warning that in its current form it could leave millions of consumers out of pocket by several hundred pounds per claim.

The group is to apply to the upper tribunal for a review of the scheme, arguing that it should “fairly reflect” the harm drivers have suffered, with “properly calculated compensatory interest”.

It said the FCA had chosen to apply the Supreme Court’s judgment in Johnson v FirstRand as a benchmark for cases which receive full commission redress, but in doing so had excluded the “vast majority” of consumer complaints from receiving such redress.

Instead, most consumers would receive redress based on a complex “hybrid” calculation which it says is “fundamentally flawed and significantly underestimates the true harm suffered”.

As part of the challenge, Consumer Voice is recommending that the scheme can start, apart from the rules around redress, while the tribunal considers the challenge.

Consumer Voice co-founder Alex Neill said: “We are taking this unprecedented step to challenge the regulator’s redress scheme because it doesn’t deliver fair or lawful compensation for drivers.

“We support a redress scheme being put in place, but as it stands millions of people will be under-compensated, and the lenders involved in this scandal won’t be meaningfully held to account.

“The FCA has designed a scheme that leaves ordinary motorists hundreds of pounds per claim out of pocket.

That cannot be left unchallenged.”
She added: “Consumers have been let down by the lenders who missold them car finance.

“They should not be let down again by the regulator that is meant to protect them.

The FCA must fix the scheme and deliver the fair redress that millions of UK motorists are owed.”
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An FCA spokeswoman said: “Our scheme is the quickest, fairest way to compensate consumers.

“It seems contradictory that organisations claiming to represent consumers would seek to delay payouts for millions of people.”
The regulator confirmed last month that millions of motorists are in line for compensation for being missold a car finance agreement between 2007 and 2024.

Firms are expected to pay out compensation totalling around £7.5 billion, down from a previous estimate of £8.2 billion, and based on about 75% of eligible consumers making a claim.

Taking into account the cost of running the scheme, such as dealing with the millions of complaints, the total bill rises to £9.1 billion – lower than the £11 billion estimated under previous proposals published last October.

The reduction in costs for banks comes from the FCA deciding to tighten eligibility for redress so that loans with low commissions or zero interest rates will not be included.

This has helped bring down the number of agreements estimated to be eligible for compensation to 12.1 million from 14.2 million.

But the tweak has also pushed up the average expected payout from £700 to £830, meaning people could get more from their claims.

Lenders and carmakers, including Santander , BMW and Mercedes-Benz , have already set aside billions of pounds to cover compensation costs.

The FCA thinks millions of claims will be paid out this year, and the vast majority will be settled by the end of 2027.

Many people have already complained and lenders are expected to begin contacting customers from June 30.