Car finance: Barclays becomes first big lender to offer payouts for mis-selling of loans

Bank to make ‘early settlement’ offers before outcome of legal battle, with those who accept likely to get money before Christmas

Barclays will this month start offering compensation to tens of thousands of people who claim they were mis-sold car loans, with some of those who accept likely to see the money land in their account before Christmas.

Amid an ongoing legal battle over an industry-wide compensation scheme for victims of the UK’s car finance scandal, Barclays has become the first big UK lender to break cover and begin offering payouts to some customers who have complained.

Under the rules, “early settlement” offers of this kind must at least match what people would receive under the multibillion-pound scheme that is being challenged – which may help to address fears that banks might try to make “lowball” offers.

But consumers face a tricky decision as, depending on the outcome of the legal battle, they could end up with more money, less money or nothing at all if they decide to decline the offer and wait.

In March this year, the Financial Conduct Authority (FCA) announced a £9.1bn compensation scheme for the millions of victims of the scandal.

But legal challenges forced the regulator to partly suspend the scheme, and a hearing to decide what happens is due to go ahead in February next year.

The FCA had expected to start paying out £829 on average this year to those affected by the scandal, in which drivers were overcharged for loans as a result of commission payments between lenders and car dealers between 2007 and 2024.

Millions of people were treated unfairly when they took out motor finance to buy a new or secondhand car, motorbike or van, and ended up paying more than they should have done.

Until the legal challenge is concluded, lenders do not need to pay compensation to people owed money under the scheme.

However, Barclays Partner Finance – part of the banking group – has decided to offer payments now to some of those who would be due compensation under the scheme.

That has prompted speculation that other companies on the hook for payouts will follow suit.

It is understood that over the next couple of weeks, tens of thousands of Barclays customers who have already complained will be contacted directly and offered “an early full and final settlement”.

Barclays is using the FCA model to calculate the compensation offers. It said: “Acceptance is optional, and customers will receive clear information on how their offer has been calculated and what accepting it would mean.”

They will have a month to accept or reject the offer, and if they say yes, the bank will pay the money into their designated account. It is thought the first payments for those who accept the offer will arrive before Christmas – which may feed into some people’s decision-making.

But those who accept cannot then later seek additional compensation or pursue further complaints or legal claims relating to the commission on that agreement.

Alternatively, people can reject the offer and wait to see what happens. The FCA said that if it saw off the legal challenge and its scheme was upheld, payments could begin in 2027, but if the judgment was appealed or the scheme was partially or wholly overturned, any compensation owed could be delayed until 2028 or later.

Ultimately, depending on the outcome, those who decline the early offers could end up being entitled to “more, less, or no compensation”, the regulator said. It added that it supported lenders making settlement offers, “as long as customers are offered no less than they would receive through the scheme”.

Barclays Partner Finance said it would not ask people who accept now to repay any of their compensation if the final outcome meant they would have been entitled to less cash.

Barclays has set aside £430m in connection with alleged motor finance mis-selling, and it is not clear how many people could be affected in total, or what proportion will receive early settlement offers.

Under the FCA scheme as it currently stands, compensation payments depend on the details of the case.

By far the biggest category is deals that allowed the dealer or broker to increase the interest rate the customer would pay, to get a higher commission.