Santander has confirmed it will pay compensation for mis-sold car finance deals, becoming the latest major lender to accept the Financial Conduct Authority’s (FCA) industry-wide redress scheme without a legal challenge.
The bank’s decision, announced over the weekend, means it will participate in a programme designed to compensate approximately 12.1 million customers who took out unfair motor finance agreements. The FCA has estimated the total cost of the scheme at around £7.5 billion, with an average payout of £829 per eligible consumer.
Santander said it had chosen not to challenge the scheme and would instead focus on its implementation, describing the judgment as “finely balanced” but ultimately driven by a desire to bring certainty to customers, shareholders and the wider motor finance sector.
How discretionary commission arrangements worked
At the heart of the mis-selling scandal are discretionary commission arrangements, or DCAs, a practice that was widespread in the motor finance industry until it was banned in January 2021. Under these arrangements, brokers — typically car dealers — were allowed to increase the interest rate on a customer’s car loan in order to earn a higher commission for themselves.
The system created an obvious conflict of interest. A dealer who could set a customer’s interest rate within a given band had a direct financial incentive to push the rate as high as possible. The higher the rate, the larger the dealer’s commission. Customers were rarely told about this arrangement, meaning they had no opportunity to negotiate a better deal or shop around for a cheaper loan.
The practice became standard in the industry between 2010 and 2016, with lenders providing dealers with a rate band and the dealer selecting the customer’s rate from within it. Higher rates meant higher commissions for the dealer, while the customer was left paying more than necessary, often without ever knowing.
The FCA has said this led to widespread unfairness because customers were not properly informed of the arrangement. The regulator concluded that people who were not told about a deal involving a high commission, or about a contractual tie to a particular firm, are eligible for compensation. A landmark Court of Appeal ruling in October 2024 further established that all undisclosed commissions are unlawful without the informed consent of the customer.
DCAs were banned in January 2021, but the ban did not apply to agreements made before that date, leaving millions of historic deals open to challenge. The compensation scheme now covers agreements taken out between April 6, 2007 and November 1, 2024.
Santander Consumer Finance, the UK’s third-largest car finance provider with approximately 9.4 per cent of the motor finance market, has acknowledged using DCAs in agreements before the ban. A high proportion of Santander customers who complained — 63 per cent — were confirmed to have had a discretionary commission arrangement on their loan.
The Financial Conduct Authority’s redress scheme
The FCA’s redress scheme has been split into two parts to reflect different regulatory periods. Scheme 1 covers agreements entered into between April 6, 2007 and March 31, 2014. Scheme 2 covers agreements from April 1, 2014 to November 1, 2024.
The compensation calculation differs depending on the severity of the unfairness. In rare, serious cases — described as “Johnson type” cases — customers may receive a full refund of the commission plus interest. These are cases where the commission was exceptionally high, defined as at least 50 per cent of the total cost of credit and 22.5 per cent of the loan, and involved an undisclosed DCA or tied arrangement.
For the majority of cases, a hybrid remedy will apply. This is calculated as the average of a full commission repayment and an estimated loss based on an annual percentage rate (APR) uplift. The uplift is set at 21 per cent for pre-2014 agreements and 17 per cent for post-2014 agreements, subject to caps. Compensatory interest on payments is set at the Bank of England base rate plus one per cent, with a minimum of three per cent per annum.
Lenders must set up their systems during an implementation period that ends on June 30, 2026 for Scheme 2 agreements and August 31, 2026 for Scheme 1 agreements. Once the implementation period ends, lenders have three months to contact consumers who have already complained and tell them whether they are owed compensation and how much. For consumers who have not yet complained but may be owed money, lenders must make contact within six months of the implementation period ending. Those consumers will then have six months to respond.
The FCA expects that consumers who accept their redress offers will receive payments by the end of 2026, with payments for those who have not yet complained likely extending into 2027. Consumers who have not been contacted by their lender can still lodge a complaint directly by August 31, 2027.
The FCA refined the scheme after receiving more than 1,000 responses to a consultation, including input from motor finance lenders, consumer groups, carmakers and industry bodies. The feedback led to tighter eligibility criteria, meaning only those who were treated unfairly will receive compensation. The regulator also expects around a third of cases to be subject to caps to ensure consumers are not paid too much.
The types of agreements covered include Personal Contract Purchase (PCP), Hire Purchase (HP) and conditional sale agreements. The scheme does not cover regulated consumer hire agreements, such as Personal Contract Hire (PCH).
Santander’s decision and industry reaction
Santander’s decision to accept the scheme follows significant financial provisioning. In November 2024, the bank set aside £295 million to cover potential compensation claims. That provision was increased by a further £166 million in February 2026, bringing the total to £461 million. Analysts have estimated Santander’s total exposure could reach as high as £1.4 billion. The bank delayed its third-quarter financial results in October 2025 because of the uncertainty surrounding the FCA’s redress scheme.
A spokesperson for Santander said: “We have decided not to challenge the schemes and will now focus on their implementation.” The bank added: “This was a finely balanced judgment reflecting our primary desire to bring greater certainty to our customers, shareholders and the wider motor finance sector, factors which outweighed our disagreement with elements of the proposed schemes.”
Barclays and Lloyds Banking Group have also decided not to challenge the FCA’s compensation scheme. However, a group of other lenders are still preparing to take legal action.
The scheme has attracted criticism from both sides. Some lenders and car finance providers argued during the consultation that the level of redress was too high and did not accurately reflect what customers actually lost. The Finance & Leasing Association (FLA) has warned that the scheme, as drafted, may not deliver the fairness, simplicity and certainty the FCA aimed for, and suggested it could compensate customers who have not suffered a loss.
On the other side, the consumer group Consumer Voice, in conjunction with Courmacs Legal, is preparing to take legal action against the FCA. They argue that the redress scheme is inadequate and potentially short-changes millions of consumers by several hundred pounds per claim. Consumer Voice believes the FCA has prioritised lenders’ interests over consumer protection and has unfairly capped interest payouts.
