A Looming £12–15 Billion Compensation Crisis

The latest research into the mis-selling of motor finance in the UK has uncovered £12–15 billion of potential compensation claims against lenders, many times greater than the £2 billion they have so far set aside [1]. Who is paying for the mis-selling scandal?

What Sparked the Car Finance Scandal

Discretionary commission arrangements (DCAs), also known as deals where the dealer could increase the interest rate to make more money for themselves, were a central feature of this scandal. They’ve been banned since January 2021, but these deals were prevalent in motor finance contracts prior to then.

A pivotal Supreme Court ruling in early August 2025 reversed much of a previous Court of Appeal decision. Instead, the highest court found that only certain unfair conduct, such as undisclosed high commissions, needed to be addressed, spurring the Financial Conduct Authority (FCA) to propose a narrower redress scheme [2].

To understand the car finance scandal in depth, check this explainer.

What the FCA Has Announced

The FCA estimates that the cost of the compensation scheme will likely fall between £9 billion and £18 billion [3], with pensions and administrative costs included.

Consultation will begin by October 2025, last around six weeks, and eligible consumers could receive their compensation in 2026 [4]. The FCA plans to determine whether the scheme will be opt‑in or opt‑out, which could materially affect overall costs, and is likely to apply a simple interest rate of around 3% per year to payouts [5].

Who’s Being Affected?

• Over 14 million motor finance agreements [6] were signed between 2007 and 2021 that included DCAs.
• Most individual claimants are expected to receive average payouts of around £950 per agreement [7], though a small number could qualify for significantly more.
• Some cases not involving DCAs but with excessive or undisclosed fixed commissions may also qualify if deemed unfair by the FCA.

For more on car finance claims, see Reclaim247’s guidance.

Which Organisations Are Exposed?

Banks such as Lloyds, Barclays, Close Brothers, Santander, and FirstRand (trading as MotoNovo) [8], as well as carmakers’ finance arms, are expected to contribute to the compensation fund. Many have set aside funds, but these fall well short of anticipated liabilities.

What Does it Mean for Consumers?

• If you suspect you’ve paid voluntarily inflated interest fees, particularly via a PCP or HP agreement that included a DCA, you should complain now, even before the scheme is finalised.
• While consumers can submit complaints directly to their lender, many choose to work with a regulated claims management company for support. This can be helpful for those who prefer professional assistance with the process, but it’s important to understand any fees involved. Always ensure the firm is authorised by the FCA and operates on a no win, no fee basis to protect you from upfront costs.
• If you’ve already filed a complaint, or are covered by a DCA, you may not need to take action again when the scheme launches.

If you’re considering PCP claims, visit Reclaim247’s relevant page.

Taking Action: What to Do Now

1. Review your finance paperwork to determine whether your agreement included a DCA.
2. Submit a formal complaint to your lender if you suspect any undisclosed commission, especially via PCP.
3. Stay alert for the FCA consultation in October 2025 and further announcements through 2026.

For the latest on car finance deals and redress settlements, visit Reclaim247’s updates.

In Summary

The car finance scandal could become the biggest consumer redress scheme in UK history. The gap between provision and liability will have major consequences for lender responsibility and systemic financial risk. The FCA’s suggested redress scheme seems to strike a balance between fairness, accessibility and market stability while acknowledging the potential for consumer harm. Watch this space for the consultation in October 2025 and get ready to have your say if you’re affected.

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References:

1. £12–15 billion of potential compensation claims against lenders, many times greater than the £2 billion they have so far set aside - https://www.thetimes.com/business-money/companies/article/who-will-pay-for-the-car-finance-compensation-scheme-n9x9bf5g8
2. narrower redress scheme - https://apnews.com/article/car-finance-britain-automobiles-compensation-dcb6dca61ce428375589873236ec6b9d
3. compensation scheme will likely fall between £9 billion and £18 billion - https://www.reuters.com/business/finance/uks-fca-proposes-9-billion-18-billion-pound-redress-scheme-motor-finance-claims-2025-08-03/
4. Consultation will begin by October 2025, last around six weeks, and eligible consumers could receive their compensation in 2026 - https://www.fca.org.uk/news/press-releases/fca-consult-motor-finance-compensation-scheme
5. apply a simple interest rate of around 3% per year to payouts - https://www.thetimes.com/business-money/companies/article/who-will-pay-for-the-car-finance-compensation-scheme-n9x9bf5g8
6. 14 million motor finance agreements - https://www.theguardian.com/business/2025/aug/04/who-will-get-car-loan-payout-how-much-regulator
7. receive payouts of around £950 per agreement - https://www.birminghammail.co.uk/motoring/motoring-news/14-million-drivers-could-receive-32193839
8. Lloyds, Barclays, Close Brothers, Santander, and FirstRand - https://www.reuters.com/business/finance/british-bank-shares-jump-after-supreme-court-ruling-car-loan-claims-2025-08-04/