Kevin PeacheyCost of living correspondent
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A compensation scheme for car finance mis-selling has been proposed by the financial regulator.
The Financial Conduct Authority (FCA) says payouts could result from 14 million motor finance agreements between April 2007 and November 2024, an estimated 44% of the total during that period.
While huge, an earlier Supreme Court ruling reduced the scope of those entitled to compensation when it sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other credit providers to car dealers.
What’s the scandal about?
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 often undisclosed to consumers.
The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.
Since January, it has been considering whether compensation should be paid to people with these deals since 2007.
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.
How much could victims receive, and when?
Under the proposals, the FCA expects average payouts of £700 per mis-sold agreement.
This is lower than the previous estimate from the regulator, when it said less than £950 per deal would be paid.
It also means the total estimated cost of the redress will be at the lowest end of its estimate, at about £8.2bn.
It added that the amount of money victims receive will depend on the degree of harm suffered by the consumer.
Complaints have already been made in relation to four million agreements and those who have already complained do not need to do anything, the regulator said, advising those who have yet to complain to contact their car loan provider rather than using a claims management company.
Under its plans:
- 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 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.
Who would foot the bill?
The industry is expected to cover the full costs of any potential compensation scheme, including any administrative costs.
Lenders – including some of the UK’s biggest banks and specialist motor finance firms – have set aside more than £2bn for potential payouts already.
Lloyds Bank has put aside £1.15bn, and Santander has allocated £295m.
Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m). Some of that money has been earmarked to cover legal and administrative costs.
They can still have their say on the FCA’s planned redress scheme.
What did the Supreme Court decide?
The Supreme Court considered three test cases. The cases focused on whether commission payments made by finance companies to dealers, of which the car buyers were unaware, amounted to bribery – and whether the car dealers themselves had a duty to act on behalf of their customers, rather than in their own interests.
If it had been upheld, this could have paved the way for millions to claim compensation, but the court ruled against two of the test cases, siding with finance companies.
This has narrowed the scope of people who will be able to claim compensation.
What was the case that succeeded in the Supreme Court?
Marcus Johnson
The test case involved Marcus Johnson, 34, who bought a Suzuki Swift
The Supreme Court reversed earlier court rulings in three test cases which said that hidden commissions on car loans were unlawful.
The one test case which was upheld was that of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car – a Suzuki Swift – in 2017.
He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.
“I signed a few documents and then drove away in the car,” he told the BBC.
He said he had no option but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.
Mr Johnson said he was “pleased for myself” that his case was won, “but not for the hundreds of others” who will miss out. “It’s a win, but it’s a really big bag of salt to go with it.”
In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he was appeared to have been misled over the relationship between the finance firm and the dealer.
