Car finance compensation: millions could be due refund

If you bought a car on finance before January 2021 you could be due a bumper pay-out

If you bought a vehicle via Personal Contract Purchase (PCP) or hire purchase before the end of January 2021 you might be in line for a pay-out.

The Financial Conduct Authority (FCA) has launched an investigation into the potential mis-selling of car finance that could see millions of drivers compensated.

But how do you know if you are a victim – and what should you do next?

Here we take a look at everything you need to know about this brewing financial scandal.

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What is the problem?

Lenders used to allow brokers – such as car dealers – to adjust the rate of interest charged to customers taking out car finance.

The higher the interest rate, the more commission the broker received. This was known as a discretionary commission arrangement.

Although the FCA outlawed this practice in January 2021, a high number of customers claim they were unfairly treated before this ban.

What were buyers charged?

The FCA estimated that commission models that allowed broker discretion over the interest rate may have cost customers £300 million a year more than flat fee models.

This meant they could be paying around £1,100 more in interest charges over four years on a typical £10,000 motor finance agreement.

“In some cases, information to consumers on websites and in contract documentation was not sufficiently prominent or easy to understand,” stated the FCA.

Types of complaints

Some people have complained the way their finance agreement was arranged was unfair and/or the commission wasn't properly disclosed and had an impact on how much interest they paid.

The nature of the complaints being received by the Financial Ombudsman Service include:

• They weren't told the car dealer would receive a commission for arranging the finance.
• The commission model used was unfair.
• The car dealer didn't give impartial advice because of the commission they were due to receive.
• They weren't given the best interest rate available.

Does this apply to me?

You could be in line for a pay-out if you meet the following criteria:

You used finance to buy a car, van, campervan or motorbike before 28 January 2021.

This includes hire purchase agreements such as Personal Contract Purchases (PCP).

Your lender and broker used a discretionary commission arrangement. To find out, ask your provider or access your credit file from the Information Commissioner’s Office.

However, if you used a hire agreement, such as Personal Contract Hire, or the agreement was signed after January 2021, you won’t be eligible for any payout.

How many people are affected?

It’s too early to say as not all complaints are likely to be upheld. However, millions of people have taken out finance arrangements in recent years.

Point-of-sale motor finance agreements for new and used cars rose from 1.2 million in 2008 to 2.3 million in 2017, according to the FCA. PCP arrangements were particularly widespread.

In 2020 – the last year before the FCA ban – there were 1.6 million new car registrations, according to the Society of Motor Manufacturers and Traders.

Car finance was used in 93.2% of private new car sales during this year, according to the Finance & Leasing Association.

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What are the regulators doing?

The FCA announced in January that it was reviewing historical motor finance commission arrangements and sales across several firms.

If there’s been widespread misconduct and consumers have missed out, it will identify how to ensure those owed compensation will receive an appropriate settlement.

However, the usual eight-week deadline for motor finance firms to provide a final response to customer complaints is being paused while this investigation takes place.

How is the finance industry responding?

It’s fair to say they are nervous. 

Lloyds Banking Group recently announced it had set aside £450 million to deal with the potential impact of the FCA review. “This charge includes estimates for costs and potential redress,” it stated.

However, the bank pointed out there was “significant uncertainty” as to the extent of any misconduct and customer loss.

Have complaints been upheld?

Yes. The Financial Ombudsman Service recently found the complainant’s favour in two recent decisions. Some claims have also been upheld in the county courts.

The FCA expects these victories to prompt a significant increase in complaints from consumers to firms and the ombudsman.

It has also acknowledged the “significant dispute” between some firms and consumers on whether legal and regulatory requirements have been breached.

How do I complain?

• Check if you’re eligible – and that your provider used a discretionary commission arrangement.
• Complain within the time limit. Generally, this is within six years of the problem happening – or within three years from when you became aware you had cause to complain.
• Your provider will have until 20 November 2024 to respond – unless the FCA extends this deadline. If you’re unhappy you can go to the Financial Ombudsman Service.

Taking it further

The good news is that you have longer to complain to the Financial Ombudsman Service if you fail to get a satisfactory response from your provider.

Normally, you’d have to take it to the FOS within six months of receiving the provider’s final response letter.

However, this is being extended by up to 15 months if you were sent a final response between 12 July 2023 and 20 November 2024.

You can find out more about making complaints here.

What happens next?

The FCA will spend the coming months investigating past arrangements and decide if further legal steps are necessary.

Earlier this year, it set a 37-week period for this to take place, which expires on 20 November 2024. However, this timeframe may be extended if it feels more time is required.

An update on the situation is expected from the FCA during the third quarter of this year, between July and September.