Millions of drivers who were mis-sold motor finance agreements should receive compensation this year, averaging around £829 per person, under plans by the regulator.

The Financial Conduct Authority (FCA) has set out its proposal for a redress scheme, costing lenders a total of £9.1bn, which will see fewer loan agreements eligible for compensation.

Some 12.1 million motor finance deals will meet the new criteria, down from initial estimates of 14.2 million.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

The regulator said firms are expected to pay £7.5bn to people who took out eligible motor finance deals, while the administrative cost of the scheme is forecast to reach £1.6bn.

The proposal could still be challenged by lenders and lawyers.

The FCA said: "We expect everyone to get behind the scheme, and lenders to put things right promptly for their customers."

But the Finance and Leasing Association (FLA), which represents the industry, said the scheme was too broad.

"We have always been clear that where consumers suffered loss, redress must be paid," said FLA chief executive Shanika Amarasekara.

"But any redress scheme for a market of this size must accurately identify and compensate only those customers who genuinely suffered loss."

But consumer rights group Consumer Voice said the redress scheme did not go far enough.

"Millions of people were overcharged, and our research shows some were pushed into real financial difficulty," co-founder Alex Neill said.

"This was the regulator's chance to put that right, but it instead appears to have let lenders off the hook."

The long-running multi-billion-pound saga involves car finance deals that were made between April 2007 and November 2024.

Fletcher Mumford said he has been trying to claim back mis-sold car finance for more than two years but despite repeatedly emailing, writing and phoning his lender, he hasn't heard back.

"I get a generic email saying that they've got a high volume of people contacting them at the moment," he told BBC Radio 5 Live. "But when I phone them I get through to a person who can't really tell me any information."

Mumford said he was hopeful that Monday's announcement would help speed up the process but added: "It has been two years and that does feel like a very long time to come to some sort of idea or decision."

Many of these loan agreements included discretionary commission arrangements (DCAs) where a car dealer received a fee from lenders based on the interest rate charged to the customer.

This arrangement was often not disclosed and the FCA said it provided an incentive for a buyer to be charged higher interest rates than necessary, leaving them paying too much.

In 2021 the FCA banned these deals and on Monday it said: "We need to draw a line under the past and support a healthy motor finance market for the future."

Consumers will also be considered for compensation if they were not told about two other arrangements between the lender and the car dealer.

These are:

The regulator's central compensation scheme allows people to complain and potentially receive compensation for mis-sold deals, without the need for a lawyer or to go through the courts.

Some may still decide to take a legal route.

Major lenders have set aside tens of millions of pounds to cover the cost of compensation.

Some lenders have questioned whether the FCA has the authority to implement a redress scheme for car loans agreed before 2014 because it only took over regulating the consumer finance market in April that year.

Prior to that, the Office for Fair Trading was responsible for overseeing consumer finance.

The FCA says it has the powers to include agreements before 2014 but has split the compensation scheme into two as legal protection.

One will cover car finance agreements between 6 April 2007 and 31 March 2014.

The other will cover deals from 1 April 2014 and 1 November 2024.

"If the earlier period is subject to legal challenge on these grounds, redress for consumers with agreements from April 2014 shouldn't be delayed," the FCA said.

The FCA has said an implementation period for the redress scheme will now begin to give firms time to handle complainants' cases:

Additional reporting by Esyllt Carr and Mitchell Labiak

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