Millions of motorists could be in line for compensation payouts if they were mis-sold finance agreements when buying a car.
Investigations are ongoing into activities by dealers and lenders some of which have now been banned which could eventually lead to an industry wide payout scheme to consumers.
A significant Court of Appeal decision may extend compensation to a wider group of people, prompting huge debate among consumers and policymakers. The Supreme Court will soon hear an appeal of that ruling.
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 City regulator, the Financial Conduct Authority (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).
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 before 2021.
Currently, any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts are effectively on hold.
Who may be in line for payouts?
Potentially, millions of motorists could receive payouts, depending on how their interest rate was set and what they knew about it. Those who had a finance deal, which had a DCA, before 28 January 2021 could receive compensation.
This would likely be done through a central scheme, organised by the Financial Conduct Authority (FCA), which wants an orderly compensation system in place.
It would be simpler for consumers than filing a legal complaint and would require firms to check if customers had lost out.
This compensation could be wider depending on the outcome of the Supreme Court decision.
Guidance from the FCA revealed that any compensation scheme would have to be fair to consumers but not collapse the car market.
Officials will decide within six weeks of the court decision whether a scheme will be run, although it would not be in place until 2026.
Details are still to be ironed out, such as whether it would require claimants to opt-in of the scheme.
How much could they receive?
That is far from clear yet, but lenders – including some of the UK’s biggest banks – have set aside billions of pounds already.
A driver would likely receive the difference between the amount they paid at an inflated interest rate and the rate they should have been charged.
Interest of 8% on the overpayment would be added to that loss, which could significantly increase the payout.
Exact amounts would depend on individual circumstances.
Is this a wider issue?
A decision by judges at the Court of Appeal at the end of last year has blown open the ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds.
While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the Court of Appeal decision widened the scope to any car finance commissions.
The three judges unanimously agreed that it would be illegal for the lender to pay any commission to the dealer without the informed consent of the buyer.
In other words, customers should be clearly told how much commission would be paid, and agree to it, without those details being buried in the terms and conditions of the loan.
More than 2.5 million people have already complained to their car finance providers about hidden discretionary commissions, according to Martin Lewis, the UK’s best-known money expert. Many used a template email from his MoneySavingExpert site to kickstart their claims.
The flood of complaints surged after a Court of Appeal ruling made clear that even flat commissions — the kind not based on the loan amount — could be considered illegal if they weren’t properly disclosed and customers hadn’t clearly agreed to them.
That said, Lewis isn’t convinced everyone should chase a refund. On his ITV show last month, he warned that forcing retrospective payouts might backfire. “We could end up with fewer car finance options and higher prices,” he said.
Banks, however, are already preparing for a wave of compensation. Lloyds, the UK’s largest car finance lender, has set aside £450 million. Santander UK has booked a £295 million charge, and South African bank FirstRand has taken a £130 million hit.
The situation is still developing, but if you’ve taken out car finance in the past, it may be worth checking if you were affected.
