Millions of individuals impacted by a car finance scandal may collectively receive between £9 billion and £18 billion in compensation following the unveiling of potential payout arrangements. The Financial Conduct Authority (FCA) has announced intentions to initiate a consultation on a broad compensation scheme within the industry. This decision comes in light of findings indicating that certain car dealers profited from commissions obtained from the lenders providing the financing, potentially leading to inflated interest rates for consumers.
The FCA’s actions were prompted by a recent Supreme Court ruling that clarified a related issue, potentially expanding the scope of individuals eligible for compensation. The agency aims to establish a straightforward and equitable compensation system to avoid the need for third-party claims management services, which could significantly reduce the payout received by affected consumers. While the timeline for implementing the scheme is still uncertain, efforts are underway to expedite the process and begin distributing owed funds next year.
While awaiting further details on the compensation scheme, affected consumers are encouraged to file complaints with their respective financial institutions if they believe they have been affected. The consultation process for the scheme’s operational framework is scheduled to commence in October, with potential payments anticipated to commence in the coming year.
Aside from this initiative, there are discussions about a separate compensation scheme involving Mastercard, which could result in a £200 million payout to customers. The eligibility criteria and potential compensation amounts are yet to be finalized, but estimates suggest that up to 14 million individuals could qualify for compensation.
It is crucial to note that merely receiving commission from the selling dealer may not guarantee compensation; however, cases involving “discretionary commission arrangements” could heighten the likelihood of eligibility. These arrangements allowed for fluctuating interest rates based on the dealer’s commission, potentially resulting in higher costs for consumers. The impact is expected to encompass vehicles purchased on finance between 2007 and 2021, with potential compensation amounts estimated to be under £950 per agreement.
Interest will be calculated on the compensation, with the FCA proposing an annual interest rate based on the average base rate plus 1%. The agency anticipates the total cost of the compensation scheme to range between £9 billion and £18 billion, with a mid-range estimate of around £13.5 billion.
As the regulatory body navigates the complexities of implementing the scheme, considerations include striking a balance between penalizing financial institutions and safeguarding lending practices to prevent adverse effects on the automotive industry and economy.