Car finance scandal explained: What’s going on and will you get compensation?

You can’t go on social media or switch on the television these days and fail to hear about the ongoing car finance scandal. Lenders have put aside billions of pounds in potential compensation for consumers, but court rulings have shaken things up a bit, meaning fewer people are now eligible.

The Supreme Court recently overturned a decision made by the Court of Appeal last October that declared that any type of hidden commission involved within a car finance deal was unlawful. Such a decision originally led to thousands signing up with claims firms in the hope of securing a slice of the billions set aside by lenders in case the Supreme Court ruled against them.

Now, however, it looks as if only those who had previously signed up to a finance deal involving a Discretionary Commission Arrangement (DCA), or potentially those whose finance deals involved “excessive” levels of commission, will be able to claim.

Already lost? We don’t blame you, so let us answer all of your most burning questions.

What is the car finance scandal?

The ongoing car finance scandal started at the beginning of 2024 when the UK regulator, the Financial Conduct Authority, announced that it was launching an investigation into what’s known as Discretionary Commission Arrangements (DCAs).

Outlawed in 2021, DCAs essentially mean lenders artificially inflating interest rates in order to provide the 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.

This came to a head after a Court of Appeal case between customers and some of the UK’s largest lending firms ruled that any part of a finance deal involving commission that’s not overtly outlined and agreed to by the consumer is unlawful. Such a decision sent shockwaves through the industry because this meant almost all car finance deals from 2007 could be eligible, with experts originally estimating as much as £40 billion being up for grabs in compensation.

What did the Supreme Court rule?

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, the Court did uphold a ruling in which the amount of commission paid to a dealer was deemed excessive, accounting for as much as 55 per cent of what the customer had paid.

After originally trying to push its own influence over the Court’s verdict, the Treasury said in a statement that it “respect[s] this judgment from the Supreme Court and will now work with regulators and industry to understand the impact for both firms and consumers.”

Am I owed car finance compensation?

Following the Supreme Court’s judgement, the FCA said it would launch a consultation into a potential redress scheme for those having signed up to finance deals involving DCAs, as well as those including “non-disclosure of other facts relating to the commission that [made] the relationship unfair.”

What does this mean? Well, it appears those with DCA finance agreements, as well as those who will be able to claim that their finance deal was misleading in any way, will be entitled to compensation.

In some sense, this is bad news for consumers because it means that far fewer people will be eligible to receive redress. However, it’s a slightly less severe blow to the industry, given that the issue is expected to cost around £18 billion, rather than the £40-50 billion originally expected.

Nevertheless, the Finance and Leasing Association – the trade body that represents lenders – called the idea of an official redress scheme “impractical”, saying that it has “concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best.”

How much will I get in car finance compensation?

Unfortunately, the payout for those affected looks to be a lot less than what was originally expected; while estimates suggested that most claimants would be able to walk away with four-figure sums, the FCA suggested that the majority will likely get less than £950 per finance deal.

This will come as a disappointment to some, however the FCA insists this is in an attempt to balance the impact on both businesses and consumers. But with such a low figure and many paying tens of thousands of pounds out on the average finance deal – several thousands being that of the inflated DCA interest rates – many might not get back all of what they are technically owed.

Do I need to do anything?

For the time being we recommend simply filing a complaint with your lender; there are several free tools available online, such as the one from Martin Lewis’ MoneySavingExpert, which can help you find old finance agreements and draft such a letter.

There is also the option of sitting tight for now; the chances are that the FCA will announce what’s known as an ‘opt-out’ redress scheme, which means lenders will be forced to get in contact with you in order to arrange compensation. However, there is still no harm in filing a complaint because this will cover all bases, on the basis that the FCA might make the redress scheme ‘opt-in’, forcing consumers to do the contacting legwork themselves.

Most important, however, is that Auto Express’ advice is not to sign up for any of the dozens of car-finance claims-management firms you’ve undoubtedly seen being advertised online. Not only is doing so unnecessary, but they can also take up to 30 per cent of your winnings – even if the FCA sets up an ‘opt-out’ scheme in which the claims firms would have to do nothing.

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