The City regulator has warned that the car loans mis-selling scandal could cost lenders up to £30bn in compensation, potentially affecting millions of borrowers. The Financial Conduct Authority (FCA) said it had identified widespread failings in the way car dealers and lenders sold finance agreements, including discretionary commission arrangements that incentivised higher interest rates.
FCA Investigation Findings
The FCA's investigation found that between 2007 and 2021, many car finance customers were charged higher interest rates than necessary because brokers received commissions linked to the rate. The regulator estimates that around 40% of car finance agreements during that period may have been affected. This could mean up to 10 million customers are owed compensation.
According to the FCA, the total compensation bill could range from £15bn to £30bn, making it one of the largest mis-selling scandals in UK history, comparable to the payment protection insurance (PPI) scandal. The FCA has ordered lenders to set aside funds to cover potential claims.
Industry Reaction
Banks and car finance companies have reacted with alarm, warning that the scale of compensation could destabilise the sector. Shares in major lenders such as Lloyds Banking Group and Barclays fell sharply on the news. A spokesperson for UK Finance, the banking trade body, said: 'The industry is committed to treating customers fairly, but the FCA's estimates appear to be based on worst-case scenarios. We urge the regulator to ensure any redress scheme is proportionate and avoids unintended consequences for the broader economy.'
Consumer Impact
Consumer groups have welcomed the FCA's intervention, saying it will provide justice for millions of people who were overcharged. Citizens Advice reported a surge in inquiries from car owners seeking information about potential claims. The FCA has set up a dedicated website and helpline to assist consumers, and is expected to launch a formal compensation scheme later this year.
Next Steps
The FCA is currently consulting on the details of the redress scheme, with a final decision expected in the autumn. Lenders will be required to write to affected customers and offer compensation, including interest. The regulator has also indicated it may take enforcement action against firms that failed to ensure fair treatment of customers.
