Legal Challenges Could Freeze Some Car Finance Payouts as Final Deadline Passes

The final compliance deadline in the Financial Conduct Authority’s car finance redress scheme lands on 31 August, the point at which lenders must be ready to start working out who is owed money on motor finance agreements taken out before April 2014. But a live legal challenge means some drivers who were quoted an inflated interest rate, without ever being told a hidden commission arrangement was behind it, could see their payout frozen even as the deadline passes.

The scheme covers agreements taken out between 6 April 2007 and 1 November 2024, where a lender paid commission to a broker, usually the dealer selling the car, without properly disclosing it to the customer. Courts ruled that this widespread practice broke the law. The FCA estimates 12.1 million agreements are now eligible for compensation, down from 14.2 million at the consultation stage after the regulator tightened the criteria, with an average payout of £829 and a total redress bill of £7.5 billion.

Why the Deadline Does Not Mean an Instant Payout

The FCA split the scheme into two parts. Agreements from 1 April 2014 onward had to be scheme-ready by 30 June 2026. Agreements from 6 April 2007 to 31 March 2014, the older and generally higher-loss cases, must be ready by 31 August 2026. Passing that date does not mean money lands in accounts straight away. Lenders then have three months to tell anyone who has already complained whether they are owed compensation and how much, and six months to write to customers who have not complained but are identified as owed money.

Customers who are contacted then have six months to respond and join the scheme. Anyone the FCA identifies as a possible match who has not been contacted directly can still complain to their lender up until 31 August 2027. Millions of people are expected to be compensated within the year, with most of the rest paid by the end of 2027.

Lenders are not required to write to every customer who took out finance in the period, only those the FCA’s rules identify as potentially owed money. That distinction counts for a lot: a customer who assumes silence equals ineligibility could be wrong. Firms are permitted to use letters, email, text or phone contact, provided they include safeguards against fraud, with the scale of the scheme having already attracted scam operators posing as lenders or claims firms offering to fast-track a payout for a fee.

The FCA has set up a dedicated supervisory team, led by a director, to check that lenders are applying the eligibility rules correctly rather than quietly excluding borderline cases to save money. Firms’ senior managers must personally attest to their responsibility for delivering the scheme, and the regulator says it will use its enforcement powers if firms fail to comply. A separate taskforce, working with the Solicitors Regulation Authority, the Advertising Standards Authority and the Information Commissioner’s Office, is targeting claims management companies and law firms accused of mishandling motor finance claims, often by charging large fees for a process the FCA says most consumers can complete themselves for free.

The redress bill has already fallen once. At the consultation stage the FCA estimated firms could face a total cost of £11.8 billion once non-redress costs such as administration were included, against 16.8 million potentially eligible agreements. After tightening the eligibility rules and refining its analysis, the final figure dropped to £9.1 billion across 12.1 million agreements, with the regulator saying the changes cut the cost of delivering the scheme to firms by more than 40%, partly by removing a requirement to write to every customer individually. That reduction benefits lenders more than it benefits the average claimant, with fewer people now qualifying and some payouts capped, even as the headline £7.5 billion redress figure stays broadly similar to earlier estimates.

The Legal Challenge Still Hanging Over Some Cases

On 2 July, the Upper Tribunal suspended parts of the redress scheme, under terms agreed between the FCA and four firms that had challenged it. Firms must still comply with every rule that was not suspended, but the practical effect is that some categories of case are now moving through a slower, contested process rather than the fast, simplified timetable the FCA originally set out. The regulator says it will defend the scheme as lawful and continues to describe an industry-wide approach as the quickest way to resolve a problem stretching back almost two decades, rather than leaving millions of individual cases to the Financial Ombudsman Service and the courts.

Not every driver who took out motor finance in this period will qualify. Compensation depends on whether the customer was denied information about one of three specific arrangements: a discretionary commission arrangement that let the broker adjust the interest rate to earn a bigger cut, a high commission arrangement worth at least 39% of the total cost of credit and 10% of the loan, or a contractual tie giving the lender exclusivity or first refusal that was not disclosed. Cases where the commission was £120 or less on pre-2014 deals, or where no interest was charged, are treated as fair and excluded. Around 64,000 agreements, where the interest rate was already among the cheapest 5% on the market, will not receive compensation, with the FCA judging that these customers suffered no loss.

About 90,000 of the strongest cases, where the arrangement closely matches the one considered by the Supreme Court in the Johnson ruling, will get back the full commission paid plus interest. Most other eligible customers will receive a hybrid payment based on the average of their estimated loss and the commission paid, again with interest added at the Bank of England base rate plus 1%, with a 3% floor. In around one in three of these hybrid cases, the payout will be capped to avoid putting the customer in a better position than if they had been treated fairly from the start.

The FCA banned discretionary commission arrangements outright in January 2021, but the scheme reaches back to 2007, a period over which complaints kept arriving from customers who had been overcharged under agreements signed years earlier with no realistic route to individual redress without a mass scheme. Courts, including the Supreme Court in the Johnson case, found that customers were owed a duty of disclosure the industry had routinely ignored. The FCA argues that leaving the issue to run through the Financial Ombudsman Service and the civil courts case by case would have cost more than £6 billion extra and dragged on for years longer, with no guarantee that most affected customers would ever see a penny.

The regulator says the wider motor finance market has kept functioning normally through the process. Share prices of listed lenders rose by between 2.1% and 29.7% in the two weeks after the Supreme Court judgment, five new securitisations of UK car loans have completed over the past year, and a record £41 billion was lent on motor finance across 2025, 6% up on the year before. New car sales in February reached a 22-year high. The FCA reads this as evidence that a bounded, industry-wide scheme has avoided the kind of prolonged market disruption that an open-ended wave of individual litigation might have caused.

What to Do Before the Deadline

Anyone who financed a car through a dealer between 2007 and November 2024, rather than paying cash or arranging their own bank loan, should check whether they had a hire purchase or personal contract purchase agreement with commission built in, something that was standard practice across the industry rather than a rare exception. Complaining directly to the lender costs nothing and does not require a claims management company or solicitor, both of which take a cut of any payout, sometimes a large one.

People who have already complained do not need to do anything else yet, beyond waiting for their lender’s three-month response window to run its course after 31 August. People who have not complained and are not contacted by their lender within six months of the deadline should not assume they are not owed money. The FCA’s fallback deadline for direct complaints, 31 August 2027, exists precisely for cases where letters go to old addresses or get missed. Anyone who financed a car in this period and has not heard from their lender by next summer should raise a complaint themselves rather than wait to be found.

Sources:

• https://www.fca.org.uk/news/statements/fca-confirms-motor-finance-redress-scheme
• https://www.fca.org.uk/publications/policy-statements/ps26-3-motor-finance-consumer-redress-scheme
• https://www.fca.org.uk/news/statements/motor-finance-scheme-partially-suspended
• https://www.fca.org.uk/consumers/car-finance-complaints