The next PPI? Why millions may be owed compensation for car finance

Millions of motorists who purchased vehicles with car finance could get big compensation payouts as a result of a newly launched review by the Financial Conduct Authority (FCA).

The FCA banned discretionary commissions on the sale of car loans such as Hire Purchase (HP) and Personal Contract Purchase (PCP) in January 2021. But the watchdog has received what it described as a "high number" of complaints from customers about car loan sales made prior to the ban. 

These complaints "have largely been rejected by the lenders and brokers in question", said Forbes. But the Financial Ombudsman Service (FOS) sided with customers in two recent cases, "prompting the FCA to investigate the extent of the problem". 

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The regulator said that if it finds "widespread misconduct and that consumers have lost out", compensation might be due from lenders.

The FCA "wouldn't do this unless it was likely to find they were doing it wrong", said MoneySavingExpert founder Martin Lewis. And payouts over car loans, he suggested, could be on the scale of those made over payment protection insurance (PPI), a mis-selling scandal that cost banks more than £40 billion. 

What is car finance?

Consumers buying new or second-hand cars often take out car finance plans such as such as HP and PCP, explained The Guardian's money editor Hilary Osborne, "both of which involve making repayments over a long period".

About eight in ten drivers finance their new vehicles using PCPs, which involve paying a deposit and then monthly repayments for a set period that don't cover the entire cost of the car, with the option to make a final "balloon" payment at the end to own the vehicle, or just hand it back.

Before 2021, the credit brokers – who were "often the dealers themselves", said This is Money – could charge discretionary commission and adjust the rate on car loans. And the higher the rate charged, the higher the broker commission, "creating an incentive for them to sell expensive credit".

What is the FCA investigating?

The FCA probe will focus on "overcharging", said The Guardian's Osborne. Around 10,000 customers have complained to the Financial Ombudsman Service, which found that in two cases, "the way the commission arrangement between the lender and the car dealer worked was unfair to the consumer". The FCA is "clearly concerned that these are not isolated incidents", Osborne added.

Some county court "battles" have also "found in customers' favour", said This is Money, and the decisions have fuelled fears that lenders may be rejecting complaints that should be upheld. 

That loans may have been mis-sold comes as little surprise to The Times's Johanna Noble, who argued that discretionary car finance commission was a "disaster waiting to happen". Having someone who is not a qualified financial adviser selling a "complicated financial product" is "more than likely" to "lead to poor outcomes". 

It's like "buying a pension from your local supermarket", she added.

How much compensation could be paid?

Many customers could be in line to get "thousands back", said MoneySavingExpert's Lewis. Payouts would be for "either the interest on loans (which is big), the commission (which is big), or the whole loan (which is huge)".

Analysts have calculated that UK banks could be "on the hook" for more than £1 billion in compensation, said City A.M., which reported that investment bank RBC estimated a "downside impact" of between some £2 billion and £8 billion for the motor finance sector.

The FCA has paused an eight-week deadline for motor finance firms to provide a final response to relevant commission complaints, while the review is carried out. The pause applies to complaints received on or after 17 November 2023 and on or before 25 September 2024.

Consumers also have up to 15 months to refer their complaint to the Financial Ombudsman Service, rather than the usual six months.

"Anyone" who took out a car loan before 2021 "should check their contracts to make sure that they were not overcharged commission", said The Times's Noble. And "If you think you were, make a complaint to your lender", ready for when the claims process begins again, she urged. 

Then " just wait for those claim management firms to start calling".