Millions of victims of car finance mis-selling could receive less compensation than previously estimated, under plans from the regulator.

The Financial Conduct Authority (FCA) said payouts could result from 14 million motor finance agreements between April 2007 and November 2024.

The regulator previously suggested motorists could receive less than £950 per deal, but it now says the average will be about £700 per agreement. Lenders could pay out £8.2bn in compensation.

The payouts are over commission arrangements between lenders and dealers, unfair contracts, and inaccurate information given to car buyers.

“It’s time their customers get fair compensation,” Nikhil Rathi, chief executive of the FCA, said.

“We recognise that there will be a wide range of views on the scheme, its scope, timeframe and how compensation is calculated. On such a complex issue, not everyone will get everything they would like.”

The scheme would be free to access for consumers, although the interest they receive on redress will be much lower than that paid following the payment protection insurance (PPI) scandal.

The FCA estimates that 44% of all motor finance agreements made since 2007 will be eligible for payouts.

However, a ruling at the Supreme Court in August limited the breadth of these cases.

The FCA advises anyone who wants to make a complaint to get in touch with their lender or broker, and has this guidance on how to complain.

But the director of the body that represents the lending industry said the FCA “is overcompensating”.

“We are going to look very closely at what the FCA has published,” Adrian Dally from the Finance and Leasing Association told the BBC’s Today programme.

“At first glance it does look to us like the FCA is overcompensating here. We don’t recognise losses on that scale,” he said, adding that he thinks the number of people whom the FCA said lost out “seems implausibly high”.

“We think it’s significantly less,” he said, though he admitted that “some customers did not necessarily get the best deal”.

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

About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

In 2021, the FCA banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs) and were undisclosed, meaning drivers were at risk of overpaying for the loan.

Other car buyers had an unfair contract because the commission paid to the dealer was so high, accounting for at least 35% of the total cost of credit and 10% of the loan, and some were not given accurate information about getting the best finance deal because of an exclusive rights given to certain lenders.

The regulator has now proposed a scheme to compensate drivers who were subject to these arrangements. If it gets the go-ahead, once the scheme starts:

• lenders will contact those who have already complained. If they don’t hear back after one month, lenders will assume they should look at the case and pay compensation if appropriate
• those who have already complained before the scheme gets up and running are likely to receive compensation faster
• those who have not complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt in to the scheme to have their case reviewed. They will have six months to decide
• those motor finance borrowers who do not receive a letter, for example because lenders no longer have their details and cannot trace them, will have a year from the scheme starting to make a claim

The regulator admitted that consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case.

David Bott, senior partner from Bott and Co, which is representing some drivers in court, said: “The true measure of success will be whether it delivers meaningful compensation that reflects the real financial harm suffered by consumers.

“The average payout figure of £700 per agreement raises serious questions about whether the scale of redress will match the severity of wrongdoing.”

Complaints have already been made in relation to four million deals, although they have mostly been on hold.

Kevin Durkin, from HD Law, which represented Marcus Johnson, who won his case in the Supreme Court, said mis-selling victims “have been treated unfairly for a second time” with these proposals.

He described the plans as “watered down”, despite consumers having been disadvantaged and out of pocket.

The FCA wants the new scheme to be up and running by early next year, with quick payouts made after that. However, for some – especially if contact details have changed – it could be many months for compensation to be paid.

Martin Lewis, from Moneysavingexpert, said he hoped lenders would not fight against the regulator’s proposals.

“If they want clarity, then don’t fight this. Let’s all move on,” he said.

Alex Neill, co-founder of consumer rights group Consumer Voice said: “This is a pivotal moment for the regulator, as compensating the millions of victims of the car finance scandal is long overdue.”

Some people who have used claims management companies to pursue their case will need to make a decision on whether to remain with those representatives who take a cut of a payout, or use the FCA redress scheme and potentially pay an exit fee.