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Car finance: What's behind the mis-selling complaints? Car finance: What's behind the mis-selling complaints?
(21 days later)
People mis-sold finance agreements when buying cars could wait months for a decision on whether they should receive compensation. Millions of motorists could be in line for compensation payouts if they were mis-sold finance agreements when buying a car.
A decision by judges at the Court of Appeal has blown open an ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds. 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.
But the higher Supreme Court has now agreed to hear an appeal against the decision. 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.
The Financial Conduct Authority (FCA) has also allowed motor finance providers extra time to deal with complaints. What's the scandal about?
Lawyers acting for motorists say this could further delay compensation which should be paid to car buyers who may not have given their informed consent for the commission payments.
Who may be in line for payouts?
The vast majority of new cars, and many second-hand ones, are bought with finance agreements.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.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 a complicated, and long-running, series of developments, many of these agreements have come under scrutiny. 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).
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. It said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate. 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.Since January, it has been considering whether compensation should be paid to people with these deals before 2021.
That has created the prospect of banks and other lenders having to make payouts totalling millions of pounds. Currently, any claims on this issue made to the ombudsman, which has tens of thousands of open cases, or the courts are effectively on hold.
Last month, a decision at the Court of Appeal broadened the net of those who could receive compensation, potentially increasing the lenders' final bill to billions of pounds. Who may be in line for payouts?
Why was the judges' decision so important? 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.
If such a plan was confirmed then further details, such as whether motorists would need to make a complaint first, would need to be ironed out.
The FCA said such a scheme was now more likely to happen than when it first opened the investigation.
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.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.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.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 test case involved Marcus Johnson, 34, who bought a Suzuki SwiftThe test case involved Marcus Johnson, 34, who bought a Suzuki Swift
The hearing included the test case of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car - a Suzuki Swift - in 2017.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.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."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.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."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.
Following the judges decision in his - and two other car buyers' - favour, banks have set aside millions of pounds for potential compensation. Lloyds Banking Group, for example, has put aside £1.2bn.
It's thought the total cost of compensation could reach £25bn or more, according to analysts.
How has the regulator responded?
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.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.Some could come from people previously told they had no claim for compensation because they did not have a discretionary commission arrangement.
The regulator has extended the time providers have to consider complaints until December 2025, aligning the deadline for firms to deal with discretionary and non-discretionary arrangement complaints. But the Supreme Court will soon hear an appeal against the decision on the wider commission issue.
The time period covers claims regarding leasing deals, as well as Personal Contract Purchase (PCP) agreements. The total cost of compensation could reach £25bn or more, according to analysts.
The FCA also wants the Supreme Court to make a quick decision when it reconsiders the Court of Appeal's ruling. When will the Supreme Court make a decision?
It wants an orderly compensation system, if it comes to that. The hearing is scheduled for three days, starting on 1 April.
The Finance and Leasing Association, the trade body for motor finance providers, welcomed the extension. A judgement by the court judges will be made some time later.
However, others have questioned whether it creates a further compensation delay for those who were mis-sold these agreements.
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.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.