The UK financial watchdog has said it is gearing up to launch an industry-wide redress scheme for customers who were mis-sold car finance as it prepares for next month’s landmark Supreme Court case on the sector.
The Financial Conduct Authority said on Tuesday that any redress scheme would require banks to contact customers who have lost out due to “widespread failings” and offer them appropriate compensation, under rules overseen by the watchdog.
The UK car finance market, in which Bank of Ireland has a 2 per cent share, was thrown into disarray last October when the court of appeals in London ruled that motor finance brokers must fully inform customers about the existence and size of commissions when taking out car loans, amid a wider review by the UK Financial Conduct Authority (FCA) into historical practices in the industry.
Bank of Ireland set aside a provision of £143 million (€172 million) last year for a potential compensation scheme stemming from a regulatory examination of the UK motor finance industry.
Following the recent announcement of its full year results, Bank of Ireland’s chief financial officer Mark Spain said the provision represented the group’s “best view” of the total related costs it will take to resolve the issue.
A claims scheme, requiring lenders to proactively ask customers to opt in or opt out of a review to check if they are entitled to compensation, could end up costing the sector more than if it was left to consumers to complain themselves.
“We want to provide as much certainty as possible to firms, consumers and stakeholders,” the FCA said.
“So, we are confirming that if, taking into account the Supreme Court’s decision, we conclude motor finance customers have lost out from widespread failings by firms, then it’s likely we will consult on an industry-wide redress scheme,” it added.
The FCA said it would announce its decision on introducing such a scheme within six weeks of a ruling by the Supreme Court.
The court will rule on whether secret commissions paid by banks to motor dealers for providing car loans were unlawful if customers did not give informed consent.
The regulator, which has been reviewing potential mis-selling in car finance since the start of last year, also said it may adjust its rules to reflect the Supreme Court ruling.
The UK’s highest court will hear the case at the start of next month and it is expected to announce its decision by this summer.
Analysts at HSBC have estimated the car finance scandal could cost lenders as much as £44 billion. That would make any compensation scheme the biggest of its kind.
Benjamin Toms, analyst at RBC Capital Markets, said in a note to clients the requirement for lenders to proactively offer compensation to customers “will mean that there will be a 100 per cent payout to customers where firms have failed to comply with requirements and customers have lost out as a result”.
Toms added that it was not clear how firms that have “expunged customers’ records after seven years – in line with regulatory guidance” would contact people about car finance deals as far back as 2007.
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The prospect of a scheme for car finance comes as the regulator is carrying out a review of the UK’s compensation framework, at the request of the Treasury, to examine how to avoid a repeat of such “mass redress events” in the future.
“A redress scheme would be simpler than bringing a complaint,” the FCA said, adding that it would also allow fewer customers to turn to a claims management company “meaning they would keep all of any compensation they receive”.
“It would also be more orderly and efficient for firms than a complaint-led approach, contributing to a well-functioning market in the future,” it added.
The regulator has had wide-ranging powers to impose industry-wide redress schemes since 2010 but it has so far done so only twice. – Copyright The Financial Times Limited 2025
