What’s behind the mis-selling complaints?

Millions of motorists could be in line for compensation payouts if they were mis-sold finance agreements when buying a car.

Investigations are ongoing into activities by dealers and lenders – some of which have now been banned – which could eventually lead to an industry-wide payout scheme to consumers.

A Supreme Court ruling on 1 August may extend compensation to a wider group of people, prompting huge debate among consumers and policymakers.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

In 2021, the City regulator, the Financial Conduct Authority (FCA), banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs).

The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

Since January, it has been considering whether compensation should be paid to people with these deals before 2021.

Currently, any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts are effectively on hold.

Potentially, millions of motorists could receive payouts, depending on how their interest rate was set and what they knew about it. Those who had a finance deal, which had a DCA, before 28 January 2021 could receive compensation.

This would likely be done through a central scheme, organised by the Financial Conduct Authority (FCA), which wants an orderly compensation system in place.

It would be simpler for consumers than filing a legal complaint and would require firms to check if customers had lost out.

This compensation could be wider depending on the outcome of the Supreme Court decision.

Guidance from the FCA revealed that any compensation scheme would have to be fair to consumers but not collapse the car market.

Officials will decide within six weeks of the court decision whether a scheme will be run, although it would not be in place until 2026.

Details are still to be ironed out, such as whether it would require claimants to opt-in to the scheme.

That is far from clear yet, but lenders – including some of the UK’s biggest banks – have set aside billions of pounds already.

A driver would likely receive the difference between the amount they paid at an inflated interest rate and the rate they should have been charged.

Interest of 8% on the overpayment would be added to that loss, which could significantly increase the payout.

Exact amounts would depend on individual circumstances.

Lenders including major banks and specialist motor finance firms have set aside a total of more than £2bn for potential payouts.

Lloyds Bank has put aside £1.15bn, and Santander has allocated £295m.

Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m). Some of that money has been earmarked to cover legal and administrative costs.

The Financial Conduct Authority said any redress scheme would need to balance fairness to consumers who lost out, with ensuring the motor finance market remains robust.

A decision by judges at the Court of Appeal at the end of last year has blown open the ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds.

While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the Court of Appeal decision widened the scope to any car finance commissions.

The three judges unanimously agreed that it would be illegal for the lender to pay any commission to the dealer without the informed consent of the buyer.

In other words, customers should be clearly told how much commission would be paid, and agree to it, without those details being buried in the terms and conditions of the loan.

The hearing included the test case of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car – a Suzuki Swift – in 2017.

He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.

“I signed a few documents and then drove away in the car,” he told the BBC.

He said he had no option but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.

“Someone in my situation at that time, not being able to buy that kind of age car with cash, you would use finance,” he said.

The FCA said that the decision could lead to dealers and motor finance providers receiving a deluge of new complaints, and it is urging people to make a claim if they feel they were the victims of mis-selling.

Under the FCA’s plans, providers will have until December to consider and respond to complaints, aligning the deadline for firms to deal with discretionary and non-discretionary arrangement complaints.

Some could come from people previously told they had no claim for compensation because they did not have a discretionary commission arrangement.

But the Supreme Court has heard an appeal against the decision on the wider commission issue.

The total cost of compensation could reach £25bn or more, according to analysts.

The hearing was in April and the judgement by the court judges will be announced on 1 August.

In February, the Supreme Court rejected an unusual intervention from the government, which was worried huge amounts of redress payments could upset the car market and make it less competitive.

It could also affect banks’ ability to invest elsewhere as they would need the money for compensation.