Britain’s car finance market finds itself at the centre of a major mis-selling scandal after judges ruled ‘secret’ commission payments to dealers are unlawful.
The bombshell finding forced firms to suspend new borrowing deals amid fears buyers, possibly more than seven million, have not given ‘informed consent’ to car dealers being rewarded for securing loans.
The industry could face a compensation bill of £16billion, making it the costliest consumer banking scandal in Britain since the mis-selling of payment protection insurance (PPI), which cost some £50billion.
Investment bank RBC Capital Markets said Lloyds Banking Group alone could be in for £3.2billion – with Santander facing a bill of £1.4billion, Barclays £400million and Close Brothers £320million.
Lloyds said it is ‘assessing the potential impact’ of the judgment while others, including carmaker Honda and BMW, halted sale though both have resumed deliveries after assessing the ruling.
Honda Financial Services have ‘took the decision to pause funding finance business to assess this ruling’ and customers could now be owed thousands.
Britain’s car finance market has found itself at the centre of a major mis-selling scandal after judges ruled ‘secret’ commission payments to dealers are unlawful
What is happening?
The Court of Appeal last week ruled salesmen must tell customers if they receive a bonus, commission or fees as an incentive when arranging car loans.
Dealerships have responded by pulling bonuses as loan providers work out how to re-draw their sales documents so that they abide by the new rules.
Does it mean I can’t buy a car?
Not at all. No one is stopping you – but unless you have cash you may struggle to get a loan sorted out through the dealership. You could take out a loan from your bank or another lender.
What loans are affected?
Personal contract purchase (PCP) or hire purchase (HP) agreements are involved. These are used by nine out of ten drivers buying a new car.
A PCP deal lets you drive a new car for around three years, during which time you start to pay off the loan. At the end of this, you hand back the keys and stop payments or upgrade. Banks do not typically offer such loans.
Will a car loan now cost more?
Not necessarily. Greater transparency may eventually lead to motorists getting a better deal. But it is likely many were in the first place and so improved transparency will make no difference.
You could wait for the market to settle in the next few weeks or still buy the car by getting the loan from elsewhere.
Consumer site Money Saving Expert suggests looking at deals from providers such as Tesco Bank, M&S Bank and TSB, offering loans of £15,000 to £20,000 for between 6.1pc and 6.2pc APR.
The Court of Appeal last week ruled salesmen must tell customers if they receive a bonus, commission or fees as an incentive when arranging car loans (stock)
Will this loan market collapse?
Possibly. The Court of Appeal judgment came as a bolt from the blue and has sent shockwaves to the sector.
Lloyds Bank, one of the major financiers through its Black Horse brand, is not the only one to pull bonuses.
Honda Finance Europe has banned motorists from picking up vehicles until the problem gets sorted out. This behaviour could create a ‘loan famine’ that does some serious damage to the car market in the short term. But loan providers are already working to adapt.
Should I start panicking?
Definitely not. It might actually work in your favour unless you are in a desperate rush to buy a car. Dealerships do not want motors gathering dust.
Greater transparency may eventually lead to motorists getting a better deal. But it is likely many were in the first place and so improved transparency will make no difference
Is this part of a bigger scandal?
Yes and one that could lead to a payout of hundreds of pounds for more than seven million motorists.
The practice, exposed by Money Mail and dubbed PPI on Wheels, has led to an FCA probe into how many new car buyers have unwittingly signed up to a ‘discretionary commission arrangement’ since 2014.
How can I claim compensation?
Start by asking your dealership if it had a discretionary commission arrangement when you bought the car.
Use a letter template to make sure you are provided all the details at moneysavingexpert.com. Chase the provider to ensure it has your claim details. Decisions are expected next year.
Have you been affected by this issue? Email: toby.walne@dailymail.co.uk