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Millions of motorists may be entitled to compensation following potential mis-selling of car finance agreements.
Ongoing investigations are examining practices by dealerships and lenders – some of which have faced regulatory action – that could lead to a comprehensive industry-wide compensation scheme for consumers.
A Supreme Court ruling on August 1st has the potential to broaden the scope of eligible claimants, sparking significant discussion among consumers and policymakers.
The majority of new vehicles, and a considerable portion of used cars, are purchased using finance agreements.
Approximately two million vehicles are financed annually, with customers typically paying an initial deposit followed by monthly installments including interest.
In 2021, the Financial Conduct Authority (FCA), the UK’s financial regulator, prohibited discretionary commission arrangements (DCAs), wherein dealers received commission from lenders based on the interest rate charged to the customer.
The FCA determined that these arrangements incentivized dealers to charge consumers higher interest rates than necessary, resulting in overpayment.
Since January, the FCA has been evaluating whether compensation should be provided to individuals who entered into these agreements prior to 2021.
Currently, claims submitted to the Financial Ombudsman Service, which has 80,000 open cases related to this issue, and legal proceedings are effectively paused.
Millions of motorists could potentially receive compensation, contingent on the specifics of their interest rate and the transparency surrounding it. Consumers who entered into finance agreements with DCAs before January 28, 2021, may be eligible.
Compensation is likely to be administered through a centralized scheme managed by the Financial Conduct Authority (FCA), aiming to establish an organized compensation process.
This approach would streamline the process for consumers compared to individual legal action and would require firms to assess whether customers incurred losses.
The scope of compensation could be further expanded based on the outcome of the Supreme Court decision.
Guidance from the FCA indicated that any compensation scheme must be equitable for consumers while also preserving the stability of the automotive market.
Officials will decide within six weeks of the court decision whether a scheme will be implemented, although it is unlikely to be operational until 2026.
Details remain under development, including whether claimants will be required to actively opt-in to the scheme.
While uncertainties remain, lenders, including major UK banks, have already allocated billions of pounds in anticipation of potential payouts.
Compensation would likely encompass the difference between the interest rate paid and the rate that should have been applied.
Interest at a rate of 8% on the overpayment would be added to that loss, which could significantly increase the payout.
Exact compensation amounts will vary based on individual circumstances.
A decision by judges at the Court of Appeal at the end of last year has widened 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.
The hearing included the test case 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.
“Someone in my situation at that time, not being able to buy that kind of age car with cash, you would use finance,” he said.
The FCA said that the decision could lead to dealers and motor finance providers receiving a deluge of new complaints, and it is urging people to make a claim if they feel they were the victims of mis-selling.
Under the FCA’s plans, providers will have until December to consider and respond to complaints, aligning the deadline for firms to deal with discretionary and non-discretionary arrangement complaints.
Some could come from people previously told they had no claim for compensation because they did not have a discretionary commission arrangement.
But the Supreme Court has heard an appeal against the decision on the wider commission issue.
The total cost of compensation could reach £25bn or more, according to analysts.
The hearing was in April and a judgement by the court judges is expected imminently.
In February, the Supreme Court rejected an unusual intervention from the government, which was worried huge amounts of redress payments could upset the car market and make it less competitive.
It could also affect banks’ ability to invest elsewhere as they would need the money for compensation.
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