A major mis-selling scandal in Britain’s car industry continues to rumble on as consumers wait with bated breath for the outcome of a long-running investigation.
A shock ruling from the Court of Appeal recently caused chaos on forecourts, as some lenders were forced to pause loans.
This is all before the City watchdog outlines its findings into the use of secret commission payments to car dealers, which is due in spring next year.
It could impact millions of drivers who have bought a car via personal contract purchase (PCP) or hire purchase (HP), with billions being paid out in compensation.
As results of the Financial Conduct Authority’s (FCA) investigation draw closer, Telegraph Money looks at what you can do.
What is the car finance mis-selling scandal?
If you signed a car finance agreement between 2007 and 2021, there’s a chance the dealership made up an interest rate on the spot, regardless of your credit history.
Interest rates were at historic lows in 2020, yet thousands of complainants say they were still charged extortionate rates by salesmen. They are alleged to have sold finance at higher rates in return for extra pay from lenders, via a discretionary commission arrangement.
These arrangements were outlawed in 2021, and an investigation into their misuse was launched by the FCA earlier this year. Around 40pc of car finance deals involved so-called “discretionary commission arrangements” before they were banned.
Experts have compared the scale of the crisis to the PPI scandal, with some saying banks could end up facing a bill of up to £16bn for mis-sold loans.
Should I lodge a claim over mis-sold car finance?
Since the City watchdog launched its investigation, thousands of drivers have been lodging claims via claims management companies, which charge a commission fee upon the outcome.
Scores of law firms are offering “no win, no fee” deals to manage claims, but consumers should be aware that you can claim for free.
Depending on the outcome of its review next year, the FCA is also considering launching its own free redress scheme before May 2025. Consumers will be able to receive payouts from lenders without having to part with a share of their potential settlement.
How can I lodge a complaint?
You can submit claims by doing the legwork yourself, without seeking legal advice. If you think you are owed money, start by asking your dealership to confirm if it had discretionary commission arrangements in place when you purchased a car on finance.
Once you have an answer in writing, complain to your finance provider. It will likely respond by confirming it is awaiting the results of the FCA investigation to see if you are liable for compensation. Should this be the case, it’s then a waiting game until May when the outcome is expected.
However, you could be offered a settlement package by your provider beforehand.
The FCA says you “should think carefully before accepting any offer”. If you accept an offer in full, you won’t be able to take the same complaint to the Financial Ombudsman Service or pursue the case in court at a later date.
Our step-by-step guide on what to do if you think you were mis-sold car finance before 2021 outlines how you can manage your claim for free.
Remember, you do not need to still own the vehicle. For example, if it was bought in 2018 but you’ve since sold the car, you could still be rewarded compensation.
You are not eligible for compensation if you bought a car after January 2021.
How much could you be owed?
It all depends on the cost of the finance agreement in question.
Those who signed up to multiple car finance agreements in the 14-year window could be eligible for several payouts. The average mis-sold car finance payout, according to LawPlus Solicitors, is £1,500.
The FCA has suggested that for a typical £10,000 four-year car finance deal, a customer could have paid £1,100 too much interest.
Due to the wide-reaching scale of the investigation, potentially millions of customers could be in line for compensation. Lloyds Banking Group has already put aside £450m for potential fines, and the FCA has warned other banks to be prepared.
Are new car sales impacted?
Discretionary commission payments ended in 2021, but following a Court of Appeal judgment in October, the car finance market has been whipped into a frenzy as the industry grapples with what to do next.
Loan providers are adapting their policies. For example, Close Brothers temporarily stopped writing new motor loans after the judgment and will reassess its contracts, while MotoNovo has also stopped lending for now.
Secure Trust Bank, another large lender, has also “temporarily paused” new lending while it “assesses the action required”.
Honda Finance Europe has signalled a change to its lending practices. BMW paused lending this week but has since resumed.
Greater transparency when buying a car
Last month’s Court of Appeal ruling effectively declared that car salesmen now have a “fiduciary duty” to inform customers about bonuses, commissions and fees they receive from lenders.
This means they have to put the needs of the customer ahead of their own, which has implications for the payment of commissions.
Until now, many customers were in the dark about fees paid to dealers – an issue that prompted the courts to take action. Judges said consumers needed to know all the material facts that could affect their borrowing decision.
The ruling has implications well beyond just the car finance industry, with the potential to affect everything purchased on credit, from washing machines to mobile phones.