Car Finance Compensation: What it means if you’ve already signed up

Watchdog advice on car finance compensation ignores millions already with legal help, putting them at risk of poor decisions and lower payouts.

The Financial Conduct Authority (FCA) says millions of people could be owed billions in compensation for unfair car finance deals, and is preparing an industry-wide scheme with a total estimated cost – including administration – of £9 to £18 billion.

At the same time, it’s warning people off using claims management companies (CMCs) or lawyers, saying it could cost consumers up to 30% in fees of any compensation they receive.

But the FCA has overlooked one crucial fact: more than 3.8 million consumers have already signed up with law firms over mis-sold car finance, representing over 7.8 million claims – an average of two per person. And that’s just from the six of eleven law firms willing to share their data with us; the real figure is almost certainly higher.

These consumers didn’t act on a whim – they acted because, after banning discretionary commission in 2021, the FCA failed to compensate victims. For years, the regulator’s inaction left many consumers with only one real option: seek legal help to assert their rights.

We would agree that it is right to advise consumers to be cautious now about signing up with a CMC or a law firm. But this blunt message doesn’t reflect the fact that it’s far too early to know whether the FCA’s redress scheme will deliver a better outcome than pursuing a claim using  professional representation. 

And worse, there is no clear advice for the millions who have already signed up with a law firm or CMC, beyond a reminder that everybody has the right to cancel their contracts but may need to pay a fee for doing so.  

So, right now, millions are left in limbo, unsure of their next steps. If you’re one of them, read our advice now to understand your position, and sign up to Consumer Voice to get our independent advice on exactly what to do when the scheme is finalised.

What’s happening nowTrusting lenders who are liable for up to £18 billion

Lenders could be liable for up to £18 billion in car finance redress – yet they’re the ones the FCA wants to decide what’s ‘fair’. Can consumers really trust them to deliver justice?

Around two million customers a year rely on motor finance, with total lending of around £40 billion annually. The FCA’s consultation promises fairness, simplicity, and market integrity. It has indicated most people will probably receive less than £950 per agreement, but has not yet set out the criteria lenders will use to determine what each consumer is owed. 

And let’s not forget: it’s the same lenders who benefited from these arrangements for years – often without adequate oversight – who are now being asked to help fix the problem. Can they be trusted to assess fairness impartially?

Elizabeth Comley, chief operating officer at Slater and Gordon, said: “There are three big problems with letting lenders decide what’s fair for consumers: records are incomplete, tracing people will be inconsistent and slow, and asking lenders to assess whether their own deals were unfair is a clear conflict of interest.” 

We saw immediate resistance within the industry following the FCA’s announcement that it will be consulting on a scheme to compensate consumers. 

Stephen Haddrill, director general of the Finance & Leasing Association, the industry’s trade body, said: “We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best.”

These comments underline why the FCA must ensure the scheme does not hand responsibility for redress back to the very firms that may have caused the harm in the first place. Consumers deserve better.

Car finance consumers left behind by the watchdog

For years, car buyers unknowingly overpaid for loans. Between 2007 and 2020, there were 25.9 million motor finance agreements, with 14.6 million involving discretionary commission arrangements – generating an estimated £8.1 billion in commission.

When the FCA finally banned discretionary commissions in 2021, it was already too late for millions who had been harmed by the practice. Worse still, the regulator’s delay in creating a proper route to compensation left a vacuum – one that law firms and CMCs stepped into, offering consumers a route to redress.

Case in point: Manchester driver wins £4,000

A 29-year-old driver from Manchester fell into serious debt after taking out what he described as a “predatory” car finance agreement.

After buying a £13,000 used car on finance, repayments left Jay Chapman owing nearly £19,000 – almost 50% more than the vehicle’s value. Mechanical problems and costly repairs made the situation worse, trapping him in a loan he couldn’t escape.

With support from Barings Law, he secured almost £4,000 in damages, which allowed him to exit the agreement and settle his debt.

Robert Whitehead, Chairman of Barings Law, said: “Many drivers just like Jay have fallen victim to predatory loan arrangements, benefiting the pockets of unscrupulous lenders who unfairly pushed up prices.” 

Jay’s case wasn’t about discretionary or unfair commissions – the focus of the FCA’s proposed scheme – but it shows how drivers continued to be caught out by unaffordable or excessive loans even after the regulator’s intervention. 

It’s a stark reminder that consumer harm in motor finance extends well beyond a single practice, and why redress must be comprehensive.

Constructing a fair redress scheme

The FCA’s scheme must be fair, comprehensive, and easy to navigate. The recent Supreme Court ruling confirms compensation should also apply to some non-discretionary arrangements where commissions were excessive or not properly disclosed.

An FCA spokesperson told Consumer Voice: “We will ensure firms handle claims consistently, efficiently, and fairly, and accurately reflect the nature and status of any potential claims.”

But it is still unclear how “unfairness” will be determined. Expecting consumers to trust lenders to assess their own conduct raises serious concerns. 

Comley added: “Consumers deserve a process where fairness is independently assessed, with the option of legal advice to check and challenge those decisions.”

Consumer Voice advice for those already signed up

If you’ve already signed up with a law firm, here’s our clear advice until the FCA’s redress scheme is finalised – likely at the end of the year:

• Don’t act now. It’s too soon to know whether the FCA’s scheme will deliver a better outcome than pursuing a claim through the courts. The time to decide is when the full details are published.
• Expect to be informed. Your law firm should contact you once the FCA’s consultation ends, explaining all your options – including any free-to-claim alternatives – so you can make an informed choice.
• Understand your exit fees. If you decide not to continue with legal representation, check what charges may apply. Firms should only bill for work they’ve actually done, and fees must be reasonable and transparent.
• Know your rights. Under Solicitor Regulatory Authority rules, your lawyer must act in your best interests, explain all possible claim routes, and be upfront if another route is free or more cost-effective. If they fail to do this, you may have grounds to complain.
• Balance your options. When the time comes, weigh the FCA scheme against the court route. Outcomes may differ depending on the evidence and circumstances of your case. You might also simply decide you need support to help you navigate the FCA compensation scheme.
• Representation is your choice. Whichever route you take, courts or the redress scheme, depending on your claim proving unfairness can be complex and will require careful judgement and it is your right to have support. 

Bottom line: don’t panic, don’t rush, and don’t make any big moves until you have the full picture.

Law firms: consumer champion or unnecessary cost?

The FCA’s stance on claims management companies and law firms may be understandable given recent misleading practices, but it must also acknowledge that many law firms stepped in when consumers were left pursuing claims alone.

CMCs will only process a claim. But law firms are bound by professional duties to act in their clients’ best interests – including explaining all possible avenues for compensation, even if that means guiding them toward the FCA’s free scheme.

Coby Benson, consumer rights solicitor at Bott & Co, said: “People should be aware of their options and, for some people, applying directly to the FCA’s redress scheme will be the right choice. But the process may be more complex.

“You might need to gather evidence, respond to challenges from lenders, and meet strict deadlines. And in cases involving hidden commission or contested finance terms, the FCA’s standard calculation may not deliver the full amount you’re legally entitled to.

“That’s where having expert legal representation could make a difference.”

Either way, it is the responsibility of solicitors to ensure every client has the information they need to make an informed choice about the best route for their claim. 

That means identifying all realistic options – whether that’s a court claim, ombudsman complaint, regulator-led scheme, group litigation or direct settlement – and explaining the pros and cons of each. 

Darren Smith, managing director at Courmacs Legal, said: “We must be clear about timeframes, costs, evidential requirements, likelihood of success, enforcement, and potential compensation. And where another route could be free or more cost-effective, we have a duty to make that clear so clients can decide what’s truly in their best interests.”

Regulator advice: right in principle, wrong in scope

It’s welcome that the FCA and SRA have tightened oversight of bad practice. But portraying law firms as unnecessary overlooks the reality: they stepped in when the FCA had yet to act, helping many consumers with the only viable route to redress for years.

Car buyers were overpaying for loans long before the 2021 ban on discretionary commissions, trusting dealers to get them the best deal – and losing out as a result. Now, with lenders expected to play a major role in delivering the FCA’s scheme, consumers need strong, independent advocates who will hold those same lenders to account and ensure fairness is assessed impartially.

In a major consumer compensation process of this scale, while we would agree that CMCs are unnecessary, law firms can still play a valuable role in guiding consumers through complex claims and protecting their interests. And may offer a more trusted route to representation when it comes to determining unfairness and the best route to achieving compensation.   

We are concerned that the FCA’s advice is lacking when it comes to guiding people who have already signed up to be represented by law firms. We asked the FCA what advice it gives to consumers who have already signed up with a CMC or a law firm, a spokesperson said:

“Consumers who have signed a contract may need to pay a fee to cancel it. If they believe the terms are unfair, didn’t knowingly agree, or were misled by advertising, they should complain to the CMC in the first instance. If they are not satisfied with the response, they can refer the complaint to the Claims Management Ombudsman or the Legal Ombudsman, who will consider it for free.”

The FCA did not give a direct answer on whether there may be some circumstances where pursuing claims with legal representation could be in consumers’ best interests. Instead, the spokesperson said:

“We want consumers to be aware of their options and make informed decisions.”

They added that while using a law firm or CMC could mean losing up to 30% of any compensation, “some consumers may still choose to use a CMC or law firm, for example, if they are short on time or feel they need additional support.”

Both the FCA (which regulates claims management companies) and the SRA (which regulates law firms) require firms to be upfront with consumers about their rights.

Under SRA rules, law firms must:

• Inform potential clients of their right to terminate an agreement before signing.
• Set out clearly any exit fees that may apply if a client decides not to proceed.
• Ensure any charges are transparent, fair, and reasonable.

Similarly, FCA rules require CMCs to:

• Tell customers they can exit an agreement at any time.
• Disclose any fees that may be payable on exit.
• Ensure fees are reasonable and reflect only the work actually carried out.

Both regulators also expect firms to inform clients of an FCA-led redress scheme, as a route to pursuing a claim for themselves, free of charge.

Fairness and choice for all

The FCA’s October consultation will be a turning point for consumer redress in car finance. But in the drive for simplicity and cost-effectiveness, the scheme must not ignore the complexity of individual cases.

The regulator must deliver a scheme that works for all consumers – not just those who have yet to act. Law firms must also meet their professional obligations, giving clients clear, unbiased advice as the redress landscape changes.

For the millions already signed up, one thing is clear: it’s too soon to be making any big decisions.

Our research

To understand the true scale of this issue, Consumer Voice approached 11 major law firms representing motor finance claimants, asking how many clients they act for and how many claims they have lodged on their behalf.

Six firms – including Bott & Co, Consumer Rights Solicitors, Courmacs Legal, Slater and Gordon, and The Claims Guys – provided figures. One other law firm shared data but asked not to be named.

From these six alone, the total number of clients represented is 3,752,824. Between them, these clients have submitted 7,751,395 claims – an average of 2.1 claims each. And remember: this excludes the five firms that declined to share figures, meaning the real total will be significantly higher.

The views in this article are those of Consumer Voice. Aside from the quotes, they should not be taken to represent the position of the individual firms named.