Millions of car buyers who took out finance with hidden costs will receive payouts this year after the Financial Conduct Authority today confirmed compensation for mis-sold agreements.
Announcing the final details this afternoon after markets had closed, the watchdog said the average payout will be around £830 – higher than it previously stated.
However, fewer consumers will get pay-outs as the scope of the scheme has been reduced and this could lead to future private court claims.
The FCA expects 12.1m consumers will now get cash and the total bill for the industry is likely to be in the region of £7.5bn – down from a previous estimate of around £10bn.
Consumers will not know up front how much money they are owed as the lenders will calculate the amount. The amount will be calculated on how much commission was paid, how much extra interest was paid, plus 3% interest per year on top.
The compensation scheme will cover loans taken out between April 6, 2007 and November 1, 2024.
People will only be compensated if they were not told clearly that the dealer or broker set the interest rate to earn more commission or at least 39% of the total cost of credit and 10% of the loan.
Also compensation will be paid if the dealer or broker was using one lender or gave one lender the right of first refusal under a so-called tied arrangement, except where lenders can show that there were visible links with a manufacturer and franchised dealer. For example, where they shared a common or similar name.
Consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case.
However, the outcome of a court claim is uncertain and accounting for legal fees they may pay, many consumers could end up with 30% less. The FCA’s scheme is also likely to be faster and simpler.
Announcing the move, Nikhil Rathi, chief executive of the FCA, said in a statement today, ”We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5bn back into people’s pockets.
“Now we need everyone to get behind it and ensure millions get their money this year. Payouts should not be delayed any longer, especially as household bills come under greater pressure.
“Delivering compensation promptly also gives lenders the chance to rebuild trust, and means we can draw a line under the past and support a healthy motor finance market for the future.”
