Car Finance Mis-Selling: What You Need to Know and How to Take Action
Car Finance Mis-Selling: What You Need to Know and How to Take Action.
The FCA is expected to disclose additional information regarding a possible redress scheme by May 2025.
A significant number of drivers in the UK may be eligible for compensation as the financial regulatory authority examines potential mis-selling in car finance agreements.
The Financial Conduct Authority (FCA) has indicated that certain consumers "may have been overcharged" for car finance loans issued prior to January 2021.
The car finance sector in the UK is valued at £40 billion, with over 90% of new vehicles acquired through financing options, as reported by The Car Expert.
This article outlines essential information regarding the situation and the process for filing a complaint if you believe you have been impacted.
What is the issue with car finance?
Prior to January 28, 2021, certain car finance lenders engaged in 'discretionary commission arrangements' with brokers.
This arrangement allowed brokers to modify the interest rates for customers, resulting in higher commissions for brokers when the rates were elevated.
Such a system may have motivated brokers to increase interest rates in order to enhance their earnings. Consequently, if you financed a vehicle through a broker under one of these arrangements, there is a possibility that you were charged excessively.
The Financial Conduct Authority (FCA) prohibited this practice in January 2021; however, a significant number of individuals have reported being overcharged prior to the prohibition.
In January 2024, the FCA announced its intention to 'investigate the matter', utilizing its authority under the Financial Services and Markets Act 2000 to assess past motor finance commission arrangements and sales practices.
In a subsequent update in May, the Financial Ombudsman Service (FOS) indicated that it had approximately 20,000 unresolved complaints concerning car finance commissions.
How to determine whether you are impacted by the issue.
The Financial Conduct Authority (FCA) indicates that you may be impacted by this issue if:
- You acquired a vehicle through a financing arrangement (such as hire purchase or personal contract purchase) prior to 28 January 2021.
- There existed a discretionary commission arrangement between your lender and broker.
You may not be aware if such an agreement was in place, but your broker and lender should be able to provide this information upon your inquiry.
This investigation will not pertain to you if you engaged in car financing on or after 28 January 2021, or if you entered into a hire agreement such as personal contract hire.
Which companies are involved?
The investigation by the FCA was initiated following a decision made by the FOS against Barclays in January 2024. The FOS, responsible for resolving complaints against financial institutions, determined that the bank had improperly compensated a credit broker with commission.
In response, Barclays initiated a judicial review of the ruling; however, this review was rejected in December 2024. The bank has indicated its intention to appeal the decision.
Lloyds Banking Group has previously announced plans to allocate £450 million to address the potential expenses arising from the FCA's investigation. The group facilitates loans through its Black Horse finance division, recognized as the largest motor finance provider in the UK.
Analysts from RBC Capital Markets project that the total compensation costs could reach £2.5 billion for Lloyds, £1.1 billion for Santander, £350 million for Barclays, and £250 million for Close Brothers.
How much compensation could I get?
The potential cost of redress for the industry is estimated to range from £6 billion to £16 billion.
The Financial Conduct Authority (FCA) has indicated that should it uncover 'widespread misconduct' resulting in consumer losses, it will devise a method for compensating affected individuals in a manner that is orderly, consistent, and efficient.
On July 30, the FCA noted that the likelihood of establishing a consumer redress scheme has increased since the initiation of its investigation.
In a specific case resolved by the Financial Ombudsman Service (FOS) in favor of the consumer, it was determined that the buyer had been charged an interest rate of 5.5%, whereas they could have secured a rate of 2.49% without the broker's commission.
The lender was instructed to reimburse the consumer for the difference in payments, along with interest on each overpayment at a rate of 8%.
In April, the FCA communicated with car finance companies to remind them of their obligation to maintain sufficient financial resources to address the costs associated with resolving complaints.
On July 30, the FCA announced that it would outline the subsequent steps of its investigation by May 2025, with the possibility of providing an update sooner if feasible.
Landmark mis-selling case
On 25 October, the Court of Appeal issued a ruling in favor of three borrowers who had lodged complaints against FirstRand Bank and Close Brothers regarding the possible mis-selling of car finance.
The court's decision established that it was illegal for car finance firms to pay commissions to car dealers without the borrowers' awareness.
Both institutions have expressed their intention to appeal this ruling, which may have implications for the ongoing investigation by the FCA.
How do I make a claim?
Initially, reach out to the company that provided your car finance product. Await their final response, and if you find it unsatisfactory, escalate your issue to the Financial Ombudsman Service (FOS).
Please be aware that receiving a final response from the company may take some time. The Financial Conduct Authority (FCA) has suspended the eight-week timeframe for providers to respond while it conducts its investigation.
In July 2024, the FCA announced an extension of this suspension, meaning that providers will not be required to address your car finance complaint until December 4, 2025. This extension applies to both discretionary and non-discretionary commission arrangements.
Moreover, you will have an extended period to refer your complaint to the FOS. Normally, you would have six months to escalate your complaint following the final response, but the FCA has lengthened this referral period to 15 months (or until July 29, 2026, whichever is later) for these specific car finance complaints during its ongoing investigation.
If your complaint falls under these temporary complaint-handling regulations, the company is obligated to inform you. It is advisable to maintain a record of any complaints you submit, as this may prove beneficial in the future.
Beware of claims management firms
Paid social media advertisements from claims management companies have been observed, targeting individuals who may have been victims of mis-selling and urging them to seek their assistance.
One particular advertisement inaccurately implies that drivers who financed a vehicle within the last decade may be entitled to compensation. However, eligibility is limited to those who purchased vehicles prior to January 2021.
Engaging a claims management company means that a portion of your compensation will be allocated to that firm upon a successful claim. To retain the entirety of your compensation, it is advisable to submit a complaint following the outlined procedure.
What's the best way to buy a car?
Many consumers find that purchasing a car outright with cash is not a feasible option, which has led to the emergence of various car financing alternatives to address this need.
One such option is hire purchase, where individuals make monthly payments to a lender for the vehicle. Ownership of the car is transferred to the buyer after the final payment; however, the buyer is typically responsible for ongoing servicing and insurance costs. It is important to note that monthly payments under hire purchase can be relatively high.
Another alternative is personal contract purchase, which requires an initial deposit followed by monthly payments. At the end of the term, the buyer has the option to acquire the vehicle by making a final lump sum payment, although this amount can be substantial.
Lastly, personal car leasing also involves an initial deposit and monthly payments similar to personal contract purchase, but it does not provide the option to purchase the vehicle at the end of the lease, as it is essentially a rental agreement.
For those who find these options unsuitable, obtaining a personal loan or utilizing a 0% credit card to finance the car purchase may be viable alternatives.
The ongoing investigation into car finance mis-selling is a significant step towards ensuring fairness and transparency in the industry. With the Financial Conduct Authority (FCA) actively examining past practices and the Financial Ombudsman Service (FOS) resolving consumer complaints, affected individuals have a clearer path to seek redress.
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The potential introduction of a redress scheme highlights the commitment to protecting consumers and addressing past wrongdoings. By staying informed and following the outlined complaint procedures, consumers can safeguard their rights without unnecessary costs. This investigation is a positive move towards a more ethical car finance market that prioritizes customer trust and fairness.
