Taxpayers across the United Kingdom have been issued a stark warning that a major car finance compensation scheme could ultimately burden them with costs reaching £2 billion. This substantial financial exposure stems from a regulatory loophole that City Minister Lucy Rigby is now being urged to close immediately.
Massive Redress Scheme for Mis-sold Finance
The Financial Conduct Authority (FCA) has proposed a large-scale redress programme for road users who entered into car finance agreements between 2007 and 2024. It is estimated that millions of drivers were mis-sold Personal Contract Purchase (PCP) or Hire Purchase (HP) deals, with approximately 14 million agreements potentially affected.
Tax Loophole Could Save Lenders Billions
According to reports, lenders could save around £2 billion when paying compensation due to a specific tax regulation introduced in 2015. These rules were originally designed to prevent banks from deducting compensation payouts from their profits before calculating corporation tax, ensuring financial institutions couldn't reduce their tax liabilities through such payments.
However, a significant loophole has emerged because many motor finance divisions are registered as "non-bank entities," despite being part of larger banking groups. This technical classification places them outside the scope of the 2015 rules, potentially allowing them to claim tax relief on compensation payments that would otherwise be unavailable.
Government Response and Consumer Concerns
A Treasury spokesperson addressed the situation, stating: "It is vital that consumers have access to motor finance to enable them to spread the cost of a vehicle in a way that is manageable and affordable. We want to see this issue resolved in an efficient and orderly way that provides certainty for consumers and firms."
Compensation Timeline and Process
Consumer champion Martin Lewis has provided updated information about the expected compensation process. The BBC and ITV personality explained that motorists owed compensation may receive more concrete information this Spring after weeks of limited updates.
Mr Lewis elaborated: "I'm being asked all the time about car finance misselling redress. There is nothing firm at all, but the feelers I've put out tell me they are probably going to make the announcement on the mass redress scheme in March. I would say it is at least 90% likely they will put a mass redress scheme so people can get their money back through the regulator instead of going through a claims firm."
He further clarified the expected timeline: "The timings after that when you get paid depends on whether you're 'opt out', which means you've already put a complaint in so it will be much quicker, or you're 'opt in', you haven't put a complaint in. They will need to find you and it will take longer. But I hope some people will actually get money in their pockets this year, I hope. It's not guaranteed."
The consumer expert also offered practical advice: "If you want to put a complaint in and you want to there's free help available online, you don't need to pay anyone to get a complaint in."
Broader Implications for Financial Regulation
This situation highlights ongoing challenges in financial regulation and consumer protection within the automotive finance sector. The potential £2 billion cost to taxpayers underscores the significant financial implications of regulatory gaps, while the scale of affected agreements demonstrates the widespread nature of the mis-selling issue.
As the FCA moves forward with its redress scheme and policymakers consider closing the identified loophole, millions of consumers await resolution of claims that could provide substantial compensation for financial products that may not have been appropriately sold or explained.
