The motor finance redress scheme is set to cost suppliers up to £18bn, the Financial Conduct Authority said over the weekend following the Supreme Court ruling on Friday.
Consumers may get up to £950 under the scheme proposed by the FCA which will go out for consultation.
The FCA said it will consult on an industry-wide compensation scheme. It said many motor finance firms were not complying with rules or the law by not providing customers with relevant information about commission paid by lenders to the car dealers who sold the loans.
Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules.
“It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.
“Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.
“It will take time to establish a scheme but we hope to start getting people any money they are owed next year.’
The announcement follows Friday’s landmark ruling by the Supreme Court, on cases in which the FCA had intervened.
While some motor finance customers won’t get compensation because in many cases commission payments were legal, the Court ruled that in certain circumstances the failure to properly disclose commission arrangements could be unfair and therefore unlawful.
In the three cases going before the Supreme Court, finance houses had feared a £40bn-plus hit on their bottom line but the Supreme Court kicked two cases into touch and ruled in favour of one.
The FCA said it will propose rules on how lenders should consistently, efficiently and fairly decide whether someone is owed compensation and how much. It will monitor if firms are following the rules and act if they’re not.
The FCA currently estimates that most individuals will probably receive less than £950 in compensation per agreement.
The FCA thinks it unlikely the cost of the scheme, including to run it, would be much lower than £9 billion. And it could be higher, up to £18 billion in some scenarios though the FCA doesn’t believe these are the most likely. A total cost midway in the range, as forecast by some analysts, is more plausible.
The consultation will launch by early October. If the compensation scheme goes ahead, the first payments should be made in 2026.