Drivers affected by the car finance mis-selling scandal may soon receive compensation offers from lenders even as the legal battle over the industry-wide redress scheme continues. The Financial Conduct Authority (FCA) has indicated it would not object to lenders making early settlement offers, provided customers are not worse off than under its proposed central scheme.
Legal Challenge Delays Full Compensation
The FCA's central scheme is currently facing a legal challenge, with a hearing scheduled for February. As a result, compensation payments under the scheme are unlikely to be made until late next year. However, Barclays has confirmed it will begin making early compensation offers immediately, and other lenders are expected to follow suit.
The FCA expects only a minority of claimants to receive early offers, with most having to wait for the court case to conclude. Stephen Braviner Roman, the FCA's general counsel and co-lead on the motor finance project, said: "Fair settlement offers could result in some people getting money sooner. It's clear they want the choice. Anyone who wants to wait can, and there's no obligation to agree to the offer. We'll closely monitor firms making offers and expect them to be clear what accepting an offer means."
Background of the Scandal
The vast majority of new cars and many second-hand ones are purchased with finance agreements. Customers pay an initial deposit to secure the vehicle and then a monthly fee with interest. However, millions of drivers who took out car loans between April 2007 and November 2024 will be entitled to compensation after these loans were mis-sold.
The mis-selling largely relates to discretionary commission arrangements (DCAs), where car dealers received commission from lenders based on the interest rate charged to the customer, often without the customer's knowledge. Average compensation payouts of about £829 are expected for around 12 million car loans, representing about 37% of the total number during that period.
The total compensation cost to the industry could reach £9.1 billion, including administrative costs. Individual payouts will vary depending on the degree of harm each driver suffered. With such huge payouts inevitable, some lenders have already set aside millions of pounds to cover the cost.
Barclays Leads the Way
Barclays has decided to start making compensation payments early, potentially to clear the cost off its balance sheet. A spokesperson for Barclays Partner Finance said: "By making these early settlement offers, we are giving some customers the option of receiving redress sooner, rather than waiting for the legal challenges and any subsequent FCA action to conclude. Each offer will be calculated using the FCA's redress scheme methodology. We will clearly explain how it has been calculated and what accepting a full and final settlement means, so customers can decide whether accepting the offer is right for them."
The lender said claimants would start to be contacted directly "in the coming weeks," but stressed that not all customers whose complaints were acknowledged on or before 1 October 2026 would receive an early settlement offer.
Consumer Advice and Concerns
The FCA has published a factsheet to help drivers work out whether they should accept early settlements from lenders. It includes a list of lenders making early offers to prevent claimants with other lenders from being scammed. The regulator said lenders must be clear with people about what accepting any offer means, including:
- Being able to keep any payment, even if the final settlement under the central scheme after the legal challenges proves to be smaller
- Claimants would not be able to claim more later if the outcome of the legal challenge meant they would have been paid more
- Accepting an offer takes you out of the scheme and stops any further input from the financial ombudsman
The Finance and Leasing Association, which represents lenders, said: "We want to see consumers receive the fairest outcome in as timely a way as possible and recognise that, in some cases, that may point to early settlement, while in others it may be appropriate to await greater legal certainty."
However, Kevin Durkin, solicitor advocate and director at HD Law, who represented Marcus Johnson in his successful Supreme Court case, expressed "real reservations" that fair compensation would be offered. "These are only heightened by reports that just a small number of claimants will receive what could be lowball offers. I fear this is crumbs from the table, for some customers who are highly likely to be owed more, while the vast majority will receive no offer at all," he said.
The main proposed FCA scheme remains partially suspended pending legal challenges in February. Consumer group Consumer Voice said the proposed compensation scheme left "too many people short-changed." Three lenders - Volkswagen Financial Services, Mercedes Benz Financial Services, and Credit Agricole Auto Finance - are also challenging the scheme. The UK's Upper Tribunal has agreed to hear legal challenges to the scheme, with a hearing scheduled from 16 February to 3 March.
Anyone concerned about their car finance deal who has not yet complained can still complain directly to their lender. Information on how to complain for free is available on the FCA website.
