Car finance compensation update as millions could be due back cash
THE Financial Conduct Authority (FCA) has issued a major update in the car finance compensation scandal.
In a statement today, it said it will confirm whether customers could get redress within six weeks of a Supreme Court decision.
Should a redress scheme go ahead, it could see those who bought a car, motorbike or van on finance before January 28, 2021 owed thousands of pounds.
The compensation case affects specifically those who were overcharged when they took out a loan to buy a vehicle.
Dealerships were incentivised to push customers towards pricier finance deals through what are called Discretionary Commission Arrangements (DCAs).
A Court of Appeal ruling in October last year found that a broker could not lawfully receive commission from the lender without obtaining the customer’s fully informed consent to the payment.
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The Court's decision has been applead by car finance firms Close Brothers and Motonovo.
The Supreme Court, a higher court, is now considering the appeal.
The FCA will then confirm within six weeks of the decision of that appeal whether a consultation on a redress scheme will go ahead.
If it decides one will go ahead, it will set out the timings of that consultation.
Whether a redress scheme is put in place will be decided following the consultation.
The specific "final rules" of the scheme would also be set out including when redress is expected to be paid.
The FCA estimates this will in 2026.
It has also now confirmed how that redress scheme might be shaped, including seven "principles".
These include fairness, certainty, timeliness and transparency.
Darren Richards, head of Broadstone’s Insurance, Regulatory and Risk Advisory division, said: “The update this morning from the FCA sets out some of the key decisions it is grappling with when it comes to implementing a redress scheme to deal with motor finance compensation.
"It is clear that the decisions behind the design of a redress scheme are complex and need to balance fairness for consumers and the integrity of the motor finance market.
“The message is that clear that preparation should continue – but executing redress will require consultation and there is a waiting game until the FCA concludes this process and provides details of the redress scheme."
What is the Car Finance Discretionary Commission Scandal?
The Car Finance Discretionary Commission Scandal affects those who bought a car, motorbike or van on finance before January 28, 2021.
After this date, the FCA banned lenders from using "Discretionary Commission Arrangements" (DCAs).
DCAs allowed brokers to increase interest rates on car finance loans, which in turn saw their commission bumped up.
It has been classed as an unfair practice because drivers weren't told about the DCAs and therefore thought any deals were a fixed price they couldn't negotiate on.
But, anyone who took out a vehicle on finance before January 28, 2021, could have been paying more than they should have.
The FCA has now launched an investigation to see how many people have been impacted.
MoneySavngExpert's website has a useful checklist on who might be in line for money back.
It also has a list of firms that are unlikely to have handed out dodgy deals and therefore don't owe customers money.
Lloyds Banking Group has set aside £700million for potential compensation relating to car finance scandal.
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Barclays has allocated £90million, while Santander said last year it had earmarked £295 million for potential payouts.
The Royal Bank of Canada has estimated that the industry’s bill for motor finance compensation could stretch to £13billion.
What is the FCA investigating and who is eligible for compensation?
By James Flanders, Chief Consumer Reporter
What is being investigated?
The Financial Conduct Authority (FCA) launched an investigation last year into whether motorists were unknowingly overcharged when they took out car loans.
The investigation by the City watchdog focuses on past practices where banks allowed car dealerships and brokers to set their own interest rates on loans.
Under a now-banned discretionary commission arrangement (DCA), dealerships and brokers had a financial incentive to charge higher interest rates, as their commission increased proportionally.
However, many customers were unaware of this practice.
A landmark ruling in October 2024, deemed it unlawful for car dealers, acting as brokers, to receive commissions from lenders without obtaining the customer's consent.
This applied to both discretionary commission arrangements (DCAs), where dealers set interest rates, and non-discretionary commissions.
The Supreme Court is now preparing to rule on whether lenders should be held responsible for compensating drivers.
Who is eligible for compensation?
There are two criteria you must meet to have a chance at receiving compensation.
First, you must be complaining about a finance deal on a motor vehicle (including cars, vans, motorbikes, and motorhomes) that was agreed upon 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 a Personal Contract Hire, where you give the car back at the end of the lease, are not eligible.
According to the financial regulator, on a typical £10,000 motor finance agreement, discretionary commission arrangements could have caused customers to pay an additional £1,100 in interest over a four-year term.
The FCA extended the deadline for lenders to respond to complaints, meaning borrowers whose lenders received other forms of commission may now also be eligible for compensation.
The Financial Ombudsman Service (FOS) revealed that it is grappling with a surge in complaints related to commission practices last month.
Over 60,000 complaints are awaiting resolution - a staggering threefold increase since May 2024 - highlighting a potential scandal that could rival the infamous Payment Protection Insurance (PPI) debacle.
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