Major development in car finance mis-selling saga

The Financial Conduct Authority (FCA) said it could implement an industry-wide redress scheme if it finds that motor finance customers have lost out due to widespread failings.

A redress scheme would mean affected car buyers wouldn’t need to make a complaint to their lender to get any compensation due – they would automatically be sent the cash. Payouts could typically average just over £1,100 per case.

The potential scheme is the latest development in the long-running car finance mis-selling saga. If the scheme goes ahead, the onus would be on banks to proactively inform borrowers if they were mis-sold car loans.

According to some analysts, payouts could cost lenders, including Santander, Close Brothers, Barclays and Lloyds, up to £44bn collectively.

However, any redress is still dependent on an upcoming Supreme Court case. Since the FCA launched its review, a ruling by the Court of Appeal has raised the possibility of widespread liability among motor finance firms wherever commissions were not properly disclosed to customers.

The Supreme Court will hear an appeal against the Court of Appeal’s judgment from 1 to 3 April. The FCA has been granted permission to intervene in the case and it has filed a submission with the court.

The regulator is still reviewing the past use of motor finance discretionary commission arrangements (DCAs) and is seeking to understand if firms failed to comply with requirements relating to DCAs and if consumers lost out as a result.

If they have, the FCA said it wants to make sure consumers are “appropriately compensated in an orderly, consistent and efficient way”.

A statement from the FCA said: “We want to provide as much certainty as possible to firms, consumers and stakeholders. So, we are confirming that if, taking into account the Supreme Court’s decision, we conclude motor finance customers have lost out from widespread failings by firms, then it’s likely we will consult on an industry-wide redress scheme. We previously said it is more likely than when we started our review that we will introduce an alternative way of dealing with complaints.

“Under a redress scheme, firms would be responsible for determining whether customers have lost out due to the firm’s failings. If they have, firms would need to offer appropriate compensation. We would set rules firms must follow and put checks in place to make sure they do.

“A redress scheme would be simpler for consumers than bringing a complaint. We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive. It would also be more orderly and efficient for firms than a complaint-led approach, contributing to a well-functioning market in the future.”

Martin Lewis, founder of MoneySavingExpert.com, said “consult” is mostly technical, and that it really means the FCA has made up its mind.

He said: “It plans a Section 404 redress scheme that will require lenders to proactively contact all borrowers who met the mis-selling criteria, and offer them a fixed redress based on FCA rules.

“Therefore, people won’t need to complain, they will be paid out an amount dictated by the FCA to firms based on [the consumer’s] situation. This likely stretches the net of who’ll be paid far wider (and means there’s no need to use claims firms).”

There are two main types of car finance mis-selling being looked at. The first is DCAs. This is about 40% of car finance deals, and applies where brokers and dealers could increase the amount of interest they charged customers – without their knowledge – on personal contract purchase (PCP) and hire purchase (HP) agreements up to 2021 in order to increase their commission.

The other mis-selling concerns ‘commission disclosure’ complaints. These are based on the Court of Appeal’s surprise ruling that if car finance agreements didn’t tell consumers all the details of the commission paid, including the amount, they were unlawful.

The FCA said it will confirm within six weeks of the Supreme Court’s decision if it will propose a redress scheme and, if so, how it will work.

Looking ahead, the most likely scenario is that the Supreme Court will overturn the Court of Appeal’s ruling on commission disclosure complaints. If that happens, then the redress scheme will only be set up for DCA complaints.

But if the Supreme Court upholds the Court of Appeal’s ruling, then the FCA would set up a redress scheme for all car finance. This second option could mean redress runs into the tens of billions of pounds – and so would be on the same scale as the PPI redress scheme.

Mis-selling motor finance – the story so far

In January 2021, the FCA banned car finance lenders from making DCAs with brokers for HP or PCP deals.

On 11 January 2024, the FCA announced a review into whether motor finance customers had been overcharged because of the past use of DCAs.

The regulator has been seeking to understand if there was widespread misconduct related to DCAs before the 2021 ban and if consumers have lost out. If they have, it wants to work out the best way for them to be paid compensation.

Since 6 February 2024, two million drivers have complained to car finance lenders using a free car finance reclaim tool from MoneySavingExpert, and those who haven’t have been urged to do so.

Jenny Ross, editor of Which? Money, said: “The impact of a car finance redress scheme could be huge, with potential for billions of pounds to be paid out to affected consumers.

“While much still rests on the Supreme Court decision, a redress scheme would remove the need for consumers to make a direct complaint to providers. This could greatly simplify the process and reduce the need for claims management firms to be involved, increasing the chances of motorists getting 100% of any payout that may be awarded.”