Car finance and compensation: what’s going on?

After years of consultations and debates, a compensation scheme for people mis-sold car finance deals has been announced by the Financial Conduct Authority (FCA).

I’d be willing to bet you’re being pestered by adverts, emails and texts from claims management companies at the moment, making rather outlandish promises. I’ve had 20 texts alone… and I can’t drive. It might seem tempting to just sign up, but it’ll cost you!

So how does it work – and do you need to do anything?

How much compensation might you be entitled to? It's complicated... very, very complicated (Picture: Adobe)

What are the key facts?

Here’s what you need to know:

• You need to have been sold a motor finance agreement between 6 April 2007 and 1 November 2024.
• The compensation scheme only applies if you were misled in to taking out an unfair contract, given inaccurate information or excessive commission was paid by the lender to the broker.
• It’s estimated that the scheme will apply to around four in ten car loans (40 per cent) sold during this period.
• The FCA estimates that up to 12.1 million loans could be applicable for compensation.
• The total costs of the scheme will be around £9.1 billion including administration costs.
• The average payout is predicted to be £829 – but that sum will very much vary depending on the circumstances.

What happens if I’ve complained already?

If you’re one of the four million people who’ve already complained, you’ll be contacted first once the scheme starts. You will be automatically included in the compensation guidelines as set by the FCA, unless you contact the lender to say otherwise.

What if I’ve not complained?

If you’ve not made a complaint yet, you have two options. You can wait for the lender (the firm that provided the credit) to contact you. Or you can make a claim to them now. In theory, you’ll be processed quicker if you register a complaint. But given the volumes of people who may be entitled to compensation, it makes sense to gather as much information as you can now so you can speed up the process.

Alternatively, the lender should contact you if you’re likely to qualify for compensation. The timescales for being contacted depend on when your policy was sold.

Can I trust the business to contact me?

If you’ve not been contacted, now is the time to start digging around in the back of your drawers to find your old agreements. If you are struggling to find them, your credit reference report may list old deals and bank statements could help you figure out who the lenders were. Some credit reference agencies have apps that will allow you to do this much more easily. Make sure you’ve asked for your free credit file, not the ‘paid for’ service.

If you’ve already been compensated, or the Financial Ombudsman or lender rejected your claim, you should be contacted if you are entitled to further compensation.

You can find out information and download template letters on free websites like Consumer Voice and MoneySavingExpert.

How much compensation will I get?

Do you love abstract mathematics? No? Me neither. Sadly, the way compensation is worked out is so ludicrously complicated it will defeat most people.

This is the simplest way I can describe how the compensation works for most agreements:

• Look at the total interest you paid on the agreement. You should get 17 per cent for vehicles sold after April 2014 and 21 per cent for deals sold before.
• Add this figure to the commission you paid.
• Divide by two.
• Add interest on top (there is a separate calculation for year-on-year interest rates).

You’ll get a letter with the calculations on it if a compensation offer is made, which you can then ask the firm to explain if you are unsure, or complain about if you think it’s wrong.

Do I need to use claims management companies and solicitor firms?

Claims management companies or CMCs are firms that will bring complaints or claims on your behalf for a fee. You do not need to use them to claim compensation under the FCA’s scheme. You’re throwing your money away.

Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist. Read more from him by hitting the highlighted hyperlink here.