Shares in major motor finance lenders have risen after the UK watchdog finalised its compensation scheme, which has seen the total bill for the industry cut by about £2 billion.
Lloyds Banking Group and Close Brothers were among the lenders to say they were assessing the details of the scheme after several changes were announced.
But investors appeared to be soothed by the final rules, with Lloyds and Barclays shares up by more than 1% and Close Brothers rising by around 2.5% on Tuesday.
On Monday after stock markets closed, the Financial Conduct Authority (FCA) confirmed that millions of motorists are in line for compensation for being mis-sold a car finance agreement between 2007 and 2024.
Firms are expected to pay out compensation totalling around £7.5 billion, down from a previous estimate of £8.2 billion, and based on about 75% of eligible consumers making a claim.
Also taking into account the cost of running the scheme, such as dealing with the millions of complaints, the total bill rises to £9.1 billion – coming in lower than the £11 billion it estimated under previous proposals published last October.
The reduction in costs for banks comes from the FCA deciding to tighten eligibility for redress so that loans with low commissions or zero interest rates will not be included.
This has helped bring down the total number of agreements estimated to be eligible for compensation to 12.1 million from 14.2 million.
But the tweak has also pushed up the average expected payout from £700 to £830, meaning that people could get more from their claims.
Lenders and carmakers, also including Santander, BMW and Mercedes-Benz, have already set aside billions pounds to cover compensation costs.
Provisions for the issue taken by Lloyds alone totalled £1.95 billion last year.
Paul Jennings, managing director of regulatory consulting for Kroll, said: “This is set to be the UK’s largest consumer redress scheme since PPI (payment protection insurance), with £9 billion covering more than 12 million motor finance agreements estimated to be in scope.
“It is clear from what has been published that strong lessons have been learnt from PPI.
“Firstly, this process will not drag on but crucially, companies need to deliver and the regulator will be watching closely.”
The FCA thinks millions of claims will be paid out this year, and the vast majority settled by the end of 2027.
Many people have already complained and lenders are expected to begin contacting customers from June 30.
But Alex Neill, co-founder of consumer group Consumer Voice, said that lenders “will only contact people who have complained or they have identified as being owed compensation”, so acting now rather than waiting can prevent motorists from being “overlooked”.
“The FCA said 99% of complaints before it stepped in were rejected, so there is a good chance a fresh complaint could lead to a different outcome,” she said.
“Don’t wait for the very lenders who short-changed you to tell you if you are owed a payout. Put yourself in front of them.”
