Millions of victims of the UK’s car finance scandal will receive payouts this year, the City regulator has confirmed.But the number of car loans judged to be unfair has been cut by more than 2 million, meaning fewer people will benefit, while the average payout has increased to about £830 per agreement.On Monday the Financial Conduct Authority (FCA) pressed the button on its long-awaited industry-wide scheme to compensate millions of people who were treated unfairly when they took out motor finance to buy a new or secondhand vehicle.Unveiling the final version of the scheme, the regulator said it had made several changes to proposals outlined last October in response to “conflicting feedback” from the various players in the saga, including consumer groups, lenders, brokers and car manufacturers.One of main changes is a tightening up of the rules on eligibility for a payout “so only those treated unfairly are compensated”.

The FCA said the scheme “will put £7.5bn back into people’s pockets” and result in a likely total bill for lenders of £9.1bn.It said millions of claims would be paid up later this year and the vast majority settled by the end of 2027.The mass mis-selling of car loans involved “secret” commission payments by lenders to car dealers, and millions of buyers unknowingly paying more for their finance than they should have done.

The redress scheme covers motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was paid by the lender to whoever sold the loan – usually the dealer.Vans, camper vans and motorbikes are also included.The FCA previously estimated that 14.2m loan agreements would be considered unfair and therefore due compensation, but on Monday it cut this to 12.1m.

That probably does not translate into 12,1 million people getting a payout, as some motorists bought several vehicles in the period and could therefore be eligible for multiple payouts potentially totalling several thousand pounds,The vast majority of new cars and an increasing number of used vehicles are bought with motor finance, typically either a personal contract purchase plan or a hire purchase agreement,The scheme will largely focus on people whose deal included a “discretionary commission arrangement” (DCA), a particularly controversial type of car finance banned in 2021,With these, lenders gave dealers the power to set the interest rates, with dealers getting more commission the higher the rate.

This allegedly gave dealers an incentive to overcharge customers.It is the lenders – typically banks – who are on the hook for the compensation.There are also two other main types of case.One is where there was an arrangement between the lender and the dealer that gave the lender exclusivity or first refusal when it came to providing credit, which was not properly disclosed.The other involves unfairly high commission – where the commission was at least 39% of the total cost of the credit and 10% of the amount borrowed – that was not properly disclosed.

(That 39% has been upped from the original 35%.)The FCA said there would be some exceptions, with cases considered fair and therefore not eligible for compensation, if – for example – the consumer did not suffer a loss because no better deal was available.It has all been made more complicated by the fact that the FCA has decided to split the scheme into two parts.Scheme 1 will cover agreements taken out between 6 April 2007 and 31 March 2014.Scheme 2 will cover those taken out between 1 April 2014 and 1 November 2024.

The FCA said in October last year that it expected eligible consumers to receive an average of £695 an agreement, but the various tweaks to the scheme mean this average has now increased to £829.For most people, compensation will be made up of two parts, the average of:The commission paid; and The estimated loss, based on a percentage discount of the interest they paid – 17% for cases from April 2014, and 21% for earlier agreements.One decision likely to be scrutinised is the FCA’s announcement that in its view consumers should not be put into a better position than, for example, they would have been had they been treated fairly.This means that in about one in three cases, compensation will be capped.Interest will be paid on compensation, based on the annual average Bank of England base rate per year plus 1%.

The minimum interest consumers will receive is 3% in any year.The FCA said millions of people would receive compensation this year, but the complexities of the scheme mean it is hard to say exactly how many will get their cash this year and how many will have to wait until next year or the start of 2028.Payouts will depend on whether people have complained already and how prepared and quick off the mark their lender is.One of the FCA’s key messages is “complain now to get compensation sooner”.The scheme will be free to use.

There will be a short implementation period “so firms can prepare”,This will be up to 30 June this year for loans taken out after 1 April 2014, and up to 31 August this year for older agreements,Lenders will have three months from the end of the period to let people know whether they are owed compensation and, if so, how much,“This means that people who have already complained or who complain before the end of the relevant implementation period will be compensated sooner,” the regulator said,The payout timings vary.

For a post-April 2014 agreement, for example, a lender must confirm if someone is owed money, and how much, by 30 September this year.The individual has a month to accept or challenge the offer, by 31 October.Then compensation is paid within one month, by November.But the FCA said the various timings were maximums and that in many cases the money would be paid more quickly.Lenders will only contact people who have not complained if they are likely to be owed money.

They have six months from the end of the relevant period to do so.Meanwhile, anyone not contacted has until 31 August 2027 to make a claim.Claims firms have been busy advertising and sending speculative letters to potential victims.But those who choose to use a claims management company (CMC) or law firm could lose a significant amount of any compensation owed, the regulator said.It said there was no need to use one as people could complain now for free using a template letter on its website.

Martin Lewis’s MoneySavingExpert website also has a free complaint tool and template letter that lots of people have used.The FCA has said: “If you sign up to a CMC now, you may end up paying for a service you don’t need, including up to 36% in fees, including VAT, out of any compensation you may receive.”If you are unsure about who your car finance provider was, the FCA website includes details of a few ways that you can check.Meanwhile, the credit reference agency Equifax’s myEquifax app includes a free car finance checker tool.If you signed up with a claims company or law firm and now want to opt out and use the official scheme to seek a payout, you can end your agreement but you may face an “exit fee”.

This fee “should be reasonable and should reflect the work the firm or CMC has already done,” says the FCA.You also have the option of taking your complaint to court.But the FCA says: “The outcome of a court claim is uncertain and, accounting for legal fees they may pay, many consumers could end up with less.”