7th Oct 2025 17:41
(Alliance News) - The Financial Conduct Authority on Tuesday said UK car finance mis-selling will cost banks around GBP8.2 billion, lower than it had previously forecast.
The UK's financial regulator had previously estimated that the total cost of compensation could range from GBP9 billion to GBP18 billion.
The FCA said last month that most people were likely to receive less than GBP950 for each agreement.
But it now expects a figure of around GBP700 per customer.
The FCA said its investigation found "widespread failures to adequately disclose the existence and nature of commission and contractual ties between lenders and brokers."
Of the agreements reviewed involving a discretionary commission arrangement, there was no evidence that the customer had been told about the DCA, the FCA found.
Inadequate disclosure means consumers were unable to make informed decisions and less likely to negotiate or shop around and many may have overpaid on car finance, the FCA said.
But the FCA said the majority of motor finance agreements will not qualify for compensation.
It estimates 14.2 million agreements - 44% of all agreements made since 2007 - will be considered unfair because they involve inadequate disclosure.
To qualify, consumers must have had a discretionary commission agreement, allowing car dealerships to keep any extra interest they got customers to pay on a loan; had a commission worth over 35% of the total cost of credit or 10% of the loan; or tied the dealer and lender into an exclusive arrangement.
"Our 35%/10% threshold is the point at which our analysis best indicates that borrowing costs may have been more strongly affected by the commission, such that its size would likely to have been a major consideration in the consumer's mind had they been aware of it when they took out the loan," the FCA said.
With 85% of eligible consumers forecast to take part in the scheme, this would mean estimated redress of GBP8.2 billion, including interest, the FCA said.
The estimate of 85% is based on participation rates in past redress schemes. In the "very unlikely" event of 100% take-up, firms would owe up to GBP9.7 billion in redress.
A lower 70% take up, would see the redress fall to GBP6.8 billion.
If there is 85% take-up of the scheme, the estimated costs to firms of implementing and operationalising the scheme would be GBP2.8 billion, taking the total cost to GBP11 billion.
The FCA stressed the estimates "remain highly indicative and susceptible to change."
It plans to seek comments on extending the complaint handling rules by November 4 with the consultation on the proposed redress scheme closing on November 18.
Consumers are expected to start to receive compensation in 2026.
Lloyds Banking Group PLC has set aside GBP1.2 billion to cover the cost of the redress scheme, while others exposed include Close Brothers Group PLC, S&U PLC and Vanquis Banking Group PLC.
On Tuesday, Lloyds closed down 1.2% at 83.24 pence, Close Brothers ended up 1.5% at 496.70p. S&U closed up 0.3% at 1,695.00p and Vanquis Banking ended up 1.6% at 127.70p.
By Jeremy Cutler, Alliance News reporter
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