The FCA has confirmed that it will consult on a formal scheme by October, covering borrowers affected by discretionary commission arrangements – a sales practice now under scrutiny. The regulator warned that while the scheme’s overall cost is likely to exceed £9 billion, it could rise to £18bn depending on final design and scope.

The announcement follows a significant Supreme Court ruling last week, which overturned most elements of an earlier Court of Appeal judgment that had opened the door to payouts as high as £44bn – close to the scale of the payment protection insurance (PPI) scandal. While finance firms largely prevailed, the court upheld one case where a commission was deemed “unfair” due to its size and the way it was disclosed.

Nikhil Rathi, chief executive of the FCA, said: “It is clear 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.”

Consumer advocates welcomed the move, but cautioned that the detail of the scheme will be crucial. Martin Lewis, the consumer finance campaigner, warned that “the industry could fight this and it could fight it hard”, urging lenders not to “throw more legal wobblers to slow the whole thing down”.

Alex Neill, the co-founder of Consumer Voice, said: “This is a vital opportunity to restore trust and put right wrongdoing by dealers and lenders. But as ever, the devil will be in the details – the big test is whether the scheme will deliver a fair level of compensation at scale.”

The regulator acknowledged that redress in most cases would be limited to the amount of commission paid to the car dealer, plus interest of roughly three per cent a year. It also warned that an overly burdensome scheme could prompt some lenders to withdraw affordable finance products or raise borrowing costs.

The redress proposal follows mounting pressure from MPs and campaigners. Liberal Democrat MP Bobby Dean, a member of the Treasury Committee, called the episode “the biggest consumer finance scandal since PPI”, and said: “The compensation bill is likely to surge above £10bn. Industry must learn that honesty matters and adjust their practices.”