CUSTOMERS at Lloyds and several major high street banks who were mis-sold car finance could be given thousands of pounds in compensation after a landmark ruling.
The case is linked to historical arrangements in which banks gave car dealerships and brokers the ability to set their own interest rates on loans.
The higher the interest rate they charged, the more they would earn in commission.
This was known as a discretionary commission arrangement (DCA) and was applied to many car loans without customers knowing.
The news comes after Court of Appeal judges last week ruled in favour of three borrowers whose cases were combined this year.
It said it was unlawful for lenders to have paid a commission to car dealers without the borrowers’ knowledge.
The landmark ruling was against just two banks, FirstRand and Close Brothers, but it could pave the way for other claims.
Lloyds Banking Group sold DCAs through its Black Horse brand while they were sold by Barclays through its Partner Finance arm.
The Court of Appeal said that customers need to know all the material facts that could impact their decision to take out a loan before they could agree to it.
This includes the total commission a car dealer will receive and how it was calculated.
Both banks said they plan to appeal against the ruling in the Supreme Court.
Some lawyers have speculated that the ruling could impact car lenders across the UK, which could mean that customers could receive billions of pounds in compensation.
Others could have their loan written off or cancelled.
The Financial Conduct Authority (FCA) has already launched an investigation into whether some car finance customers were charged too much on their loans.
It estimates that on a typical motor finance agreement of £10,000, higher broker commission under a DCA could leave a customer paying around £1,100 more in interest charges over the four-year term of their deal.
Martin Lewis suggests payouts of around this figure could be given to customers if it is decided that they are due compensation.
What is the FCA investigating and who is eligible for compensation?
What is being investigated?
The FCA announced in January that it would investigate allegations of “widespread misconduct” related to discretionary commission agreements (DCAs) on car loans.
When you buy a car on finance, you are effectively loaned the value of the car while you pay it off.
These loans have interest payments charged on top of them and are often organised on behalf of lenders by brokers – usually the finance arm of a dealership.
These brokers earn money in the form of commission – a percentage of the interest payments on the loan.
DCAs allowed brokers to, to a certain extent, increase the interest rate on a loan, which in turn increased the amount of commission they received.
The practice was banned by the FCA in 2021.
Who is eligible for compensation?
The FCA estimates that around 40% of car deals may have been affected before 2021.
There are two criteria you must meet to have a chance at receiving compensation.
First, you must be complaining in relation to a finance deal on a motor vehicle (including cars, vans, motorbikes and motorhomes) that was agreed before January 28 2021.
Second, you must have bought the vehicle through a mechanism like Personal Contract Purchase (PCP) or Hire Purchase (HP), which make up the majority of finance deals and mean you own the vehicle at the end of the agreement.
Drivers who leased a car through something like a Personal Contract Hire, where you give the car back at the end of the lease, are not eligible.
The FCA is planning to announce the findings of its investigation and the next steps in May 2025.
This could include launching a customer compensation scheme funded by the lenders that provided the arrangements.
The FCA said the deadline will give it time to assess whether it should allow firms to handle complaints in the usual way or take a different approach.
While it is investigating it has also extended the deadline that providers including lenders or brokers have to respond to certain car finance complaints to after December 4, 2025.
If providers need to take a new approach to deal with complaints then this will be implemented from 2026.
Any compensation that is due will be paid after this date.
In April the regulator warned car lenders to hold back cash for potential payouts.
Some analysts believe these payouts could collectively cost the industry between £8billion to £13billion.
Lloyds Banking Group has already set aside £450million to cover the cost of potential fines.
Meanwhile, Close Brothers decided not to pay investors a dividend and has taken action to “shore up” its balance sheet by up to £400million.
Lloyds Banking Group said: “The Group is assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications.
“The Group will update the market, if and as appropriate.”
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