Am I entitled to an automatic payout for mis-sold car finance? What you need to know

Millions of drivers who have been mis-sold car finance could be entitled to an automatic payout of around £1,140 after the UK’s financial regulator announced plans for a possible redress scheme.

The Financial Conduct Authority (FCA) said in a statement today that it is carrying out a review into lending practices in the motor trade. The regulator said that if it finds customers have lost out due to “widespread failings” of firms, it will “consult on an industry-wide redress scheme”.

And while the announcement is not confirmation, finance journalist and Money Saving Expert founder Martin Lewis said “consult” meant, in effect, that the FCA had “made up its mind”. He added that if the plan does go ahead, lenders will be required to “proactively contact all borrowers who met the mis-selling criteria” and offer them a fixed redress.

However, whether this goes ahead may depend on a Supreme Court ruling on the mis-selling of car loans.

Here, Yahoo News explains what you need to know.

If you’ve used finance to buy a car, motorbike or van, it’s “very likely” that the lender paid commission to the broker – the person that arranges your loan, usually your car dealer – for arranging the loan”, the FCA has said.

That’s one of the central issues at the heart of the FCA’s review into motor industry finance, and the subject of a Court of Appeal ruling on three cases in October 2024.

The court decided it was against the law for the dealers to receive a commission from the lender without first telling the customer about the commission and getting their informed consent to the payment.

Informed consent “will depend on the facts of each case”, the FCA said, but in these particular cases, it included telling the customer about the amount of commission and how it was calculated.

The lenders involved in the case have taken it to the Supreme Court to challenge it, but unless judges overturn the ruling, which is now law.

While the FCA already appears to have its sights set on a redress scheme, the regulator has said it will confirm within six weeks of the Supreme Court’s decision whether it will propose introducing one. The case is due to be heard on 1 to 3 April.

As Lewis explains, the FCA is looking at two main types of car finance mis-selling.

• Discretionary Commission Arrangement (DCA): This arrangement, which covers about 40% of car finance deals, allowed brokers and dealers to increase the amount of interest they charged customers without telling them, on PCP and Hire Purchase agreements up to 2021 – resulting in a secretly increased commission.

• Commission Disclosure complaints: This relates to the Court of Appeal’s ruling that if car finance agreements didn’t make it clear to consumers all details of commission, including the amount, they were unlawful. Lewis says this applies to up to 99% of car finance cases.

If you took out a deal that meets these above criteria, you may be entitled to compensation if the FCA’s redress scheme gets off the ground.

However, Lewis raises the possibility of the Supreme Court overturning the Court of Appeal’s ruling on Commission Disclosure complaints, which came as a surprise to many, meaning only DCA customers would be eligible for compensation.

While it has not been confirmed how much buyers would be entitled to, Lewis said the typical payout for a DCA claim is £1,140.

Under a redress scheme, providers (lenders or brokers) would have to decide if customers had lost out and then offer compensation where appropriate, the FCA says.

The regulator would set the rules for providers to follow and would check to make sure they are sticking to them.

This means that under this redress system, lenders would be proactively required to contact you if you have been mis-sold insurance.

For this reason, Lewis says there is now “far less need” to complain directly, although this has not been confirmed by the regulator yet.

On its website, the FCA still invites people to make complaints about commission, first by getting in touch with your lender or broker, explaining why you want to complain and providing key details such as your policy number, date of agreement, address at the time of the agreement and registration plate.

Once you’ve made a complaint, your provider should send you an acknowledgement within eight weeks, the FCA says.

If it doesn’t, you should send a follow-up message, although the firm won’t have to send a final response until after 4 December this year, the regulator adds.

If you’re unhappy with your provider’s response, the FCA advises you to complain through the Financial Ombudsman Service, here.