FCA launches car finance mis-selling investigation

The Financial Conduct Authority (FCA) launched a major investigation into car finance mis-selling in January 2024, with a focus on discretionary commission arrangements (DCAs)¹. At the same time it announced a pause on the handling of complaints about car finance agreements involving a DCA, meaning lenders did not need to respond to complaints until September 2024¹.

DCAs allowed brokers and dealers to raise interest rates in order to earn higher commission, and around 40% of car finance deals were believed to have them¹. The FCA found this created a clear incentive for customers to be charged more than necessary, increasing the overall cost of the loan, and it banned DCAs in January 2021¹. The investigation examined whether customers were overcharged between April 2007 and January 2021, following a Financial Ombudsman ruling against Barclays over unfair commission payments¹.

The complaint pause was extended several times. In September 2024 the FCA extended it until 4 December 2025, and from 26 October 2024 it covered all types of commission, not just DCAs¹. On 3 December 2025 the FCA confirmed the pause on firms handling motor finance complaints will end on 31 May 2026¹.

Separate court cases ran alongside the investigation. On 25 October 2024 the Court of Appeal ruled in favour of three borrowers filing complaints against Close Brothers and FirstRand Bank, determining that it was unlawful for car finance companies not to inform customers of commission earned, whether discretionary or a fixed percentage¹. Both companies appealed, and on 1 August 2025 the Supreme Court overturned the Court of Appeal's decision, ruling that commission payments paid by buyers to car dealers were unlawful¹. The panel of five judges sided with the lenders and found they are effectively not liable for hidden commission payments to dealers¹. The High Court upheld the complaint against Barclays Partner Finance in December 2024¹.

On 7 October 2025 the FCA launched a consultation on a proposed redress scheme for those overcharged through car finance deals between April 2007 and November 2024¹. On 30 March 2026 the FCA announced the full plan, having made several changes after feedback from consumers, firms and industry bodies through its 2025 consultation¹. Fewer agreements qualified, with around 12.1m expected to be eligible, down from 14.2m, while the average compensation increased for older agreements and a minimum interest rate of 3% a year was added to payouts¹.

On 1 May 2026 the FCA confirmed it had received legal challenges against its compensation scheme from Consumer Voice (a limited company), represented by Courmacs Legal Ltd, and three from lenders: Volkswagen Financial Services, Mercedes Benz Financial Services and Crédit Agricole Auto Finance¹.

Why it matters for households

Car finance loans taken out between 6 April 2007 and 1 November 2024 are covered by the FCA compensation scheme if the customer was not clearly told that their dealer or broker could set a higher interest rate to earn bigger commission, that the commission was at least 10% of the loan or 39% of the total cost of credit, or that the dealer worked with only one lender¹. The FCA says the average payout is likely to be around £829, and customers with more than one agreement in the period could receive multiple payments¹.

Compensation has two parts: a refund of the commission paid, and an amount for estimated loss of 17% of the interest paid for cases from April 2014, or 21% for loans made before that¹. Interest is also paid on compensation, based on the annual average Bank of England base rate per year plus 1%, at a minimum of 3% in any year¹. The FCA has said compensation will not put customers in a better position than if they had been treated fairly, so some payments will be capped, with around one in three cases affected¹. Overall, the FCA estimates the scheme could cost around £7.5bn if 75% of eligible customers make a claim¹.

Some cases are excluded. Customers may not be eligible if the commission was £120 or less for agreements beginning before 1 April 2014 and £150 or less from that date, if the DCA was not used to earn discretionary commission, if no interest was charged, or if the lender can prove in limited circumstances that it was fair not to disclose the arrangement or that the customer suffered no loss¹. Claims for high-value loans, meaning amounts higher than 99.5% of other loans that year, are not covered, though those customers can still complain to firms and the Financial Ombudsman Service¹.

What happens next

The FCA has said customers who have already complained to their lender do not need to do anything else for now, and that people who think they were affected should still complain to their lender despite the legal challenges¹. Under the original plan, lenders would review cases automatically and tell customers within three months whether compensation is owed, and lenders were set to contact eligible customers directly, usually by email or other digital channels, provided proper fraud checks were in place¹. Once the preparation period ends, lenders will have three months to tell customers if they are owed money and how much they will get, or six months after the preparation period ends to do this¹. Customers not contacted during that time have until 31 August 2027 to make a claim under the current plan, with a deadline of 30 June 2026 for loans taken out from 1 April 2014¹.

The Financial Conduct Authority has published its scheme rules, and complaints about commission arrangements can also go to the Financial Ombudsman or court. Details of the scheme sit alongside general information on car finance companies and the wider loans market, with the motor finance redress scheme explained separately.