The UK financial regulator has scaled back its scheme to provide compensation to millions of people who were mis-sold car loans over the past two decades, reducing the costs for banks by almost £2 billion.
Bank of Ireland has a 2 per cent share of the UK motor finance market. The bank is understood to set aside cumulative provisions of €429 million for redress and compensation.
The Financial Conduct Authority on Monday said the scheme’s estimated cost for British lenders had dropped to £9.1 billion, compared with the £11 billion it forecast in initial proposals last October. It also lowered its estimate of the number of loans eligible for redress from 14.2mn to 12.1mn.
The scheme is designed to compensate customers for the cost of commissions paid by lenders to car dealerships when they provided customers with loans.
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The FCA and courts have said many of these commissions were insufficiently disclosed to consumers and often incentivised the charging of higher interest rates or were unfairly high.
The issue has at times hit the share prices of Britain’s biggest banks, which have booked billions of pounds in provisions to cover compensation costs. Carmakers such as Mercedes-Benz and BMW have also set aside more than £500mn.
The regulator said after changes to the rules of the scheme, the average payout per loan would be £829, up from £700 under its initial proposal.
Lenders are due to contact consumers from the end of June and to pay redress in the following months, but this could be delayed by legal challenges.
Nikhil Rathi, FCA chief executive, urged lenders and consumer representatives to “get behind” the scheme and “ensure millions get their money this year”. He said: “Payouts should not be delayed any longer, especially as household bills come under greater pressure.”
Most redress will be because of poorly disclosed discretionary commission arrangements, which created a conflict of interest by paying dealers more if they put customers on higher rates.
Some compensation will also be from high commissions, but the FCA raised the threshold for these to be eligible from 35 per cent of the loan cost to 39 per cent. Any commissions worth at least 10 per cent of a loan remain eligible for redress.
However, the regulator said carmakers’ in-house finance arms would no longer be automatically required to pay redress purely because they have exclusive ties to a car dealership, as first reported by the FT.
The FCA-monitored scheme is expected to produce the biggest overall payouts to customers by the UK financial sector since the scandal over payment protection insurance cost the sector about £50 billion almost a decade ago.
The regulator said it had tightened eligibility for redress so that loans with very low commissions or 0 per cent interest rates would not be included. The highest 0.5 per cent of car loans by value will not be covered by the scheme.
The FCA will now implement two separate redress schemes, one for older motor finance agreements between April 2007 to March 2014 and another from April 2014 to November 2024.
The regulator said a single unified scheme was more likely to invite a legal challenge.
However both sides of the dispute — the banks and the lawyers representing consumers — are disappointed by the scheme and are gearing up to sue the regulator, which could delay its launch by as much as a year.
Courmacs Legal, a Blackburn-based law firm, is set to file a lawsuit against Lloyds Banking Group’s Black Horse car finance unit on behalf of more than 30,000 customers seeking £66mn in damages for historic car-leasing agreements.
Darren Smith, managing director of Courmacs, which claims to manage more claims emanating from the dispute than any other, said: “The FCA’s final scheme is a complete failure for consumer rights. By prioritising lender balance sheets over fair compensation, the regulator has abandoned vulnerable motorists. Lenders are being let off the hook again.”
Shanika Amarasekara, CEO of Finance & Leasing Association, said: “While the FCA has clearly endeavoured to make the redress scheme more proportionate than the proposed scheme consulted on in October, it will take time for us to assess the market impact of the measures announced today.”
Regulators are concerned that many people have signed up with claims management companies that could take more than 30 per cent of any compensation paid and charge high exit fees if people try to pull out.
The FCA earlier on Monday said it had joined with other regulators to create a task force to “tackle poor handling of motor finance claims by some claims management companies”.
The FCA said it would share intelligence and co-ordinate action with the Solicitors Regulation Authority, the Information Commissioner’s Office and the Advertising Standards Authority. - Copyright The Financial Times Limited 2026
