Car finance mis-selling scandal: warning on claims companies, and are you due compensation?
Affected by the car finance mis-selling scandal? Here's what you need to know...
The car finance scandal is without a doubt a huge deal, with many comparing its significance to last decade’s Dieselgate and PPI affairs. Last year, the Supreme Court ruled generally in favour of consumers, paving the way for an official redress scheme that’s set to put motorists in line for a share of what’s expected to be over £8.2 billion in compensation payouts.
Santander says it has just set aside a further £183 million for car finance scandal payouts, with the bank’s total provision now totalling as much as £461 million. Lloyds, on the other hand, has over £1.2 billion ready for payouts, with bosses warning that even this might not be enough.
However, as with anything involving legal disputes, regulators and finances, the whole situation is rather complicated. This might leave you with questions like…
- Are you eligible for compensation?
- How much might you get?
- When might the payments arrive?
- Should I use a car finance claims company?
Our handy guide to the scandal below explains it all, as well as looking at how the situation started in the first place.
Who’s in line for compensation?
Amidst confusion over who can claim, the Financial Conduct Authority (FCA) has outlined three types of people who are eligible for compensation:
- Those who signed up to a discretionary commissions arrangement (DCA).
- Those who signed up to a finance deal with excessively high commission but were not informed.
- Those who signed up to an agreement with a broker who had already given exclusive rights to a specific lender to provide the credit.
Any agreement that matches those listed above must have been signed between 6 April 2007 and 1 November 2024 to be eligible. In total, this is generally thought to represent roughly 44 per cent of Personal Contract Purchase (PCP) and Hire Purchase (HP) agreements throughout this period.
DCAs were outlawed in 2021, so it’s unlikely that anyone signed up to one after that. However, there have since been cases of car buyers paying excessive commission and brokers being given exclusive rights by lenders, hence the broader eligibility up to 2024.
How much will I receive in car finance compensation?
The FCA estimates that average payout from the car finance scandal will total around £700 per agreement. Those who signed up to more than one “unfair” agreement will receive payments for each and thus will be entitled to more.
To be a little more specific, Moneysavingexpert’s Martin Lewis says that consumers will effectively be repaid roughly 17 per cent of what they originally forked out in interest. Therefore, if a borrower had paid £3,000 in interest on a car loan, then they would receive £510 back.
Furthermore, those who paid levels of commission equal to or above half the cost of the car loan and 22.5 per cent of the total cost of borrowing will receive both the interest and commission they paid back. That would equate to a lot more cash than the average payout, although this is only expected to be the case for a small number of claimants.
However you look at it, the average payout is still less than what was originally expected. When the issue first came to light, the general consensus was that motorists would receive around £950 per agreement. Yet even the £700 quoted by the FCA has been deemed a step too far by the car finance industry.
In a statement, the Finance and Leasing Association's CEO, Shanika Amarasekara, said: “We remain concerned that the costs are too high”. The FLA’s Director of Motor Finance & Strategy, Adrian Dally, also told the BBC’s Today Programme that the number of people who the FCA claims lost out as a result of mis-sold car finance seems "implausibly high”.
Will I have to contact my lender?
In most cases, those affected by the mis-selling of car finance will not have to contact their lender; the FCA’s compensation scheme will see lenders forced to contact those affected within six months of its start date. After this, those affected will have a further six months to decide whether they want to opt in or not.
For those who have already filed complaints, lenders will have three months from the scheme's start date to write confirming that the complainant is taking part in the redress scheme. If the lender does not hear back after one month, it will be assumed they still want to take part.
The FCA also says that if a claimant is not contacted due to the lender not storing the appropriate information, they will have one year from the scheme starting to make a claim. Consumers are notified that they can choose not to take part in the redress scheme and go to court. This could potentially lead to them receiving even more compensation but success is far from guaranteed and the process could be time-consuming and costly.
Should I use a car finance claims management company?
You’ve probably seen adverts advertising car finance claims-management companies (CMCs), however the FCA advises consumers to avoid using them given the nature of the scheme; lenders are being told to contact claimants themselves, meaning utilising one of these claims firms in effect means superfluously giving up a potentially large proportion of your winnings.
The FCA also says that if you absolutely insist on signing up with one of these firms, make sure not to subscribe to more than one; doing so could mean you’d have to pay each one their share of your compensation, potentially leaving you with nothing. With this in mind, the FCA has instructed claims firms to allow consumers to terminate their agreements “without charging unfair fees”.
Executive director of authorisations at the FCA, Sheree Howard, said: “We’ve been clear about our expectations of CMCs. Before starting any case, firms should confirm a customer hasn’t already instructed another representative. Where someone signed up without fully understanding what they were agreeing to, we wouldn’t expect a termination fee to be charged. If any fee is applied, it must be reasonable, and reflect the work done.”
Those who have already signed up to multiple firms but don’t believe the agreement was fully explained, or those feeling that they have been unfairly charged are advised by the FCA to file a complaint directly with the CMC itself. If this is not resolved satisfactorily, the official advice is to forward their complaint to the Claims Management or Legal Ombudsman.
When will I receive compensation?
The FCA has not confirmed any exact dates as to when the redress scheme will commence, however it has indicated that it aims to finalise plans by the end of March 2026. The current pause on lenders handling complaints is set to be lifted on 31 May, with payments hopefully coming in the months thereafter.
However, it’s always possible this timescale could be pushed backwards, because many sources within the industry believe that the FCA’s impact estimations (£8.2 billion in payouts and £2.8 billion in additional costs) are drastically low. The regulator has set out methodology for what constitutes an unfair loan or excessive commission, but this is much broader than expected and could push the cost to the industry closer to £18-20 billion and ultimately fuel lengthy legal challenges by lenders.
Car finance scandal: the background
The origins of the car finance scandal can be traced back to the beginning of 2024 when the FCA announced that it was launching an investigation into what’s known as Discretionary Commission Arrangements.
Outlawed in 2021, DCAs essentially involved lenders artificially inflating interest rates in order to provide the car dealer with additional commission, thus pushing up the cost of finance for the customer. This, according to experts, was the case in roughly 40 per cent of finance deals between 2017 and 2021, costing consumers as much as £500 million per year as opposed to flat commission rates.
Everything came to a head after a Court of Appeal case between customers and some of the UK’s largest lending firms. The judge ruled that any part of a finance deal involving commission that’s not overtly outlined and agreed to by the consumer is unlawful.
This decision sent shockwaves through the car industry because it meant almost all car finance deals from 2007 could be affected, leaving the customer eligible for compensation. Experts originally estimated that as much as £40 billion could be up for grabs in compensation.
However, in early August, the UK’s highest court, the Supreme Court, overturned the Court of Appeal’s judgement, claiming that dealers do not have a fiduciary duty to act in their customer’s interest, rather than their own.
Lord Reed, the President of the Supreme Court, delivered the judgement, saying that; “At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller”.
However, as part of the same case that covered the undisclosed commission, the Supreme Court did uphold a ruling surrounding what was deemed an “excessive” amount of commission. In this instance, commission paid to a dealer accounted for as much as 55 per cent of a car finance loan – something that has now been ordered to be paid back to the customer.
Following this, the FCA said it would consult on an official redress (compensation) scheme. The details of this have now been announced and the framework for who is eligible has been made public.
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