Car finance compensation could be the spend signal that boosts the economy
When consumers receive cash that corrects a past wrong, they use it to replace cars, clear household bills, book holidays and support small businesses. That spending ripples through the economy far faster than most top-down interventions, says Brandon Lewis
When bankers were finally forced to confront the true scale of the Payment Protection Insurance (PPI) scandal, they warned of dire consequences. Lending would dry up. Balance sheets would buckle, in other words, they warned the sky would just about fall.
Far from damaging the economy, the PPI redress scheme supported it, and one of the largest consumer compensation programs in British history became an unintentional, but highly effective economic stimulus. More than £36bn was paid back to consumers who had been victims of the mis-sell, most of whom spent the money quickly and locally.
The evidence from PPI is clear. In 2014 the BBC reported that of the £13.3bn in compensation paid back, 88 per cent of it had been spent rather than saved, delivering an estimated one per cent boost to GDP. Making it “a more effective spend signal than any other government incentive”.
This aligns with broader economic research. The Institute for Fiscal Studies found that unexpected lump-sum payments to households tend to be spent, particularly among middle-and lower-income households, on consumer goods. Similar conclusions were reached internationally during Covid. Data from the US Census Bureau found that between 70 per cent and 85 per cent of stimulus cheques were mostly spent within months, particularly on durable goods, local services and debt repayment.
Correcting past wrongs
The reason is simple. When consumers receive cash that corrects a past wrong, they use it to replace cars, clear household bills, book holidays and support small businesses. That spending ripples through the economy far faster than most top-down interventions.
The motor finance scandal now presents a strikingly similar opportunity, meaning it matters far beyond the balance sheets of Britain’s banks. This redress scheme could deliver justice to the victims and provide a desperately needed consumer-led economic boost across sectors.
There are an estimated 14m motor finance agreements potentially affected by unfair commission practices, with the Financial Conduct Authority (FCA) indicating total redress could fall between £8.2bn and £9.7bn. They have recently scaled down their estimates for the average payout to be around £700 per consumer, considerably less than court-led claims in which victims received closer to £1,500.
That difference matters for both fairness and for growth.
This money was wrongfully taken from consumers. It was taken from them through practices that the FCA accepts as unfair and courts have deemed illegal. Returning it is not a bonus or handout but it is the correction of a market failure. Our economy is rules-based and when firms
break those rules, they must be held accountable or else confidence in the system will erode.
It also matters because Britain is a consumer-led economy. It is people who buy cars, book holidays, upgrade their homes and support local businesses that keep Britain ticking and it is why I have always said it is British SMEs that are the beating heart of our economy
Every pound of redress that is capped, delayed or withheld by the FCA is a pound that does not circulate through the real economy.
Yet banks and lenders are keen to frame full redress as a threat to lending, investment and financial stability. That argument should be treated with scepticism. What they describe as a cost is, in reality, a transfer from bank reserves to the consumer pocket.
The government and the FCA should see this not as an unnecessary burden on the financial sector, but as a rare opportunity to right a regulatory wrong while simultaneously driving growth. At a time of fragile consumer confidence and with an economy stuck in low gear, this is precisely the kind of targeted stimulus policymakers should welcome, not shun.
Money was taken from consumers. Paying people back in full is not just fair but it is economically sensible.