Banks face potential significant setbacks from car finance mis-selling verdict
The Financial Conduct Authority (FCA) is set to consult on a limited industry-wide compensation scheme for customers affected by excessive, undisclosed commissions in car finance mis-selling cases. This follows a landmark Supreme Court ruling in August 2025, which found that failure to properly disclose commission payments was unfair and unlawful, although not all cases qualify for compensation.
The proposed scheme aims to standardize and fairly compensate customers who lost out, with typical payouts expected to be under £950 per agreement. The overall compensation cost to the industry is estimated to be between £9 billion and £18 billion. If implemented, the scheme would begin compensation payments in 2026, with firms required to provide final complaints responses by December 2025.
Impacts on the Banking Sector and UK Economy
The banking sector, including major lenders like Lloyds Banking Group, Close Brothers, Barclays, Santander UK, and Bank of Ireland, has already provisioned nearly £2 billion for claims and could face total liabilities up to £18 billion. While this financial impact is significant, it is not catastrophic compared to previous scandals like Payment Protection Insurance mis-selling which cost £40 billion.
The Supreme Court's ruling brought substantial market uncertainty, but the eventual ruling limited the scope of liability, helping to stabilize lender share prices. Millions of consumers may receive compensation, which could help restore confidence in consumer credit markets and improve trust in financial services regulation.
Economic Implications
While the compensation burden is eye-watering, it is unlikely to threaten the overall stability of the UK financial system. However, it highlights risks in retail finance sectors and may prompt tighter regulatory oversight and changes in lending/brokerage practices.
The FCA is balancing consumer protection with market impact by consulting extensively to design a scheme that is fair, efficient, and enforceable. Consumers who believe they were affected are encouraged to complain promptly, but do not need to engage costly claims management companies.
In summary, the FCA’s consultation on a compensation scheme is imminent with payments expected to start in 2026, representing a major consumer redress initiative with significant but manageable financial effects on banks and the wider UK economy.
Financial services, often involving small print and commissions, are susceptible to litigation. This development underscores the need for transparency and clear communication in the industry. As the UK continues to develop a trend towards US-style mass consumer litigation, businesses must be prepared for the costs and uncertainties that come with it.
[1] Financial Times, "FCA to consult on car finance compensation scheme," 2025 [2] BBC News, "PPI payouts top £37 billion," 2019 [3] FCA, "Consultation Paper on Compensation Scheme for Car Finance Mis-selling," 2025 [4] The Guardian, "Supreme Court ruling on car finance mis-selling sends shares soaring," 2025 [5] Money Saving Expert, "FCA launches car finance compensation scheme consultation," 2025
- In response to the Financial Conduct Authority's (FCA) consultation on a limited industry-wide compensation scheme for car finance mis-selling cases, the banking sector, including major lenders, may face liabilities up to £18 billion for undisclosed commissions. This situation emphasizes the importance of transparency and clear communication in investing, wealth-management, and personal-finance practices.
- The implementation of the proposed compensation scheme is expected to begin in 2026, marking a significant step in UK's market regulation and consumer protection, particularly in sectors like car finance, business lending, and retail finance.
