Car finance mis-selling payout scheme could cost billions

A compensation scheme for drivers over the mis-selling of car loans could cost as much as £18bn, the financial regulator has said.

The Supreme Court ruled on Friday that hidden commissions from lenders to dealers on car loans were not unlawful, meaning millions of motorists will not be able to claim.

However, the judgement left open the possibility of compensation claims for particularly large commissions which the Supreme Court said were unfair.

Following the ruling, the Financial Conduct Authority (FCA) has said it will consult on running a payout scheme – estimated to cost between £9bn and £18bn.

It said that “most individuals will probably receive less than £950 in compensation”, with the first payouts expected next year if the scheme goes ahead.

Those who have already complained do not need to do anything, the FCA said, advising those who have yet to complain to contact their car loan provider rather than using a claims management company.

The regulator has said it will consult on who will be eligible for the payouts, adding that the Supreme Court ruling provided “clarity”.

On Friday, the Supreme Court reversed earlier court rulings which said that hidden commissions on car loans were unlawful.

However, it ruled in favour of Marcus Johnson, saying the commission paid to the dealer was so significant – 55% of the total charge or credit including interest and fees – that it was a “powerful indication” the relationship between Mr Johnson and lender FirstRand was unfair.

The Supreme Court awarded Mr Johnson the amount of a commission plus interest.

The FCA said Friday’s judgement “helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts”.