Compensation payouts on around 14 million unfair motor finance deals could start next year, at an average of about £700 each, under the UK financial watchdog’s proposed scheme. The Financial Conduct Authority (FCA) estimated its redress scheme could cost lenders £8.2 billion in compensation.

This is lower than the £9 billion to £18 billion range it had previously projected. Motor finance firms broke the law or its rules by not properly informing customers about commission paid by lenders to the car dealers that sold them the loan, the regulator said. 

Nikhil Rathi, the FCA’s chief executive, said: “Many motor finance lenders did not comply with the law or the rules.

“Now we have legal clarity, it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.

“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated.

“On such a complex issue, not everyone will get everything they would like.

“But we want to work together on the best possible scheme and draw a line under this issue quickly.

“That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”

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