The UK’s financial regulator has unveiled plans to launch a consultation exploring an industry-wide motor finance compensation scheme.

The move comes after some motor finance firms failed to comply with the law or regulation by not providing customers with relevant information about commission paid by lenders to the car dealers who sold loans.

As part of the proposed scheme, the Financial Conduct Authority (FCA) said that most individuals would likely receive less than £950 in compensation.

It predicts that while the cost of the scheme would be between £9 billion and £18 billion, somewhere midway in the range is more plausible.

The plans follow a landmark ruling by the Supreme Court, on motor finance cases in which the FCA had intervened.

While some motor finance customers won’t get compensation because in many cases commission payments were legal, the Court ruled that in certain circumstances the failure to properly disclose commission arrangements could be unfair and therefore unlawful.

“It is clear that some firms have broken the law and our rules," said Nikhil Rathi, chief executive, FCA. "It’s fair for their customers to be compensated.

"We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”

Rathi said that the FCA hopes to start getting people any money they are owed next year.

Speaking about the plans, Hyder Jumabhoy, partner at international law firm White & Case LLP and global co-head of its Financial Institutions Industry Group, said: “While the estimated cost of the customer compensation scheme is less than feared by the larger motor finance lenders, who have set aside material provisions, the FCA’s decision could still have significant ramifications for the UK motor finance industry more generally."

Jumabhoy said that it expects the move will accelerate M&A activity due to some lenders having decreased risk appetite but also because of unused provision amounts becoming available for acquisitions.

"It could also prompt some car manufacturers to enter the UK motor finance market to steady the supply of finance to buyers of new vehicles," he added. “The next six weeks in the run-up to the launch of the FCA’s consultation will be crucial, as the industry assess the implications of the Supreme Court’s ruling and the emerging shape of the scheme in 2026.”

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