Car finance scandal: What happened and are you eligible for £700 compensation payout?
Around 14 million people will be able to claim compensation for unfair motor finance deals early next year after the UK financial watchdog unveiled plans for a fix.
Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), said it was time for “customers to get fair compensation” as he announced the plan, which “aims to be simple for people to use and simple for lenders to implement”.
“We recognize that there will be a wide range of views on the programme, its scope, timeframe and how compensation will be calculated,” he added. “With such a complex issue, not everyone will get everything they want. But we want to quickly draw a line under this issue by working together on the best plan possible.”
Almost half of all car loan deals made between April 2007 and November 2024 could be eligible for an average charge of £700, creating a compensation bill for lenders of £8.2bn, according to the FCA.
With millions expected to receive compensation averaging £700, here’s how consumers They can find out whether they are suitable or not.
What is the scandal about?
According to the FCA, automotive finance firms broke the law or its rules by failing to properly inform customers about the commission lenders paid to car dealers who sold them the loan.
All car finance deals with hidden commissions were declared illegal by the Court of Appeal in October last year, months after the FCA launched an investigation into ‘Discretionary Commission Arrangements’ (DCAs).
DCAs allowed brokers and dealers to adjust interest rates for customers on Personal Contract Purchase and Hire Purchase agreements; but since brokers earned more commissions from higher rates, this created an incentive to maximize the rate offered.
An estimated 40 percent of auto finance deals were thought to be affected by this issue. This meant that many drivers did not have the opportunity to negotiate or find a better deal and therefore may have ended up paying a higher interest rate on their loans.
The FCA banned the app from January 28, 2021.
What did the Supreme Court decide in August?
Related major car finance firms Close Brothers and Motonovo went to the High Court to challenge the Court of Appeal decision, which found that commission payments made by buyers to car dealers before 2021 without the driver’s fully informed consent were unlawful.
The UK’s highest court has partially overturned the landmark ruling, ruling that lenders are not liable for hidden kickback payments on car finance deals, effectively reducing the worst-case scenario for claims payouts.
However, it fell short of a complete victory for lenders as the High Court upheld a finding that the relationship between the finance company and customer was unfair in a case involving a motorist.
This meant that the compensation payable to lenders fell significantly from the £45bn estimated today to £8.2bn.
What and when will victims be given?
Compensation payments for around 14 million unfair motor finance deals could start next year, at an average of £700 each, the FCA has said.
Who is entitled to receive payment?
Anyone who purchased a car via Hire Purchase or Personal Contract Purchase between April 2007 and November 2024 may be eligible for the compensation scheme.
The watchdog examined data from nearly 32 million deals made over a 17-year period and found that around 44 per cent of them would be deemed unfair and entitled to compensation under the FCA’s proposals.
An estimated 14 million car finance deals were believed to have been missold at the time, requiring an average payment of £700, according to the FCA.
It is estimated that around four million car finance deals are currently the subject of complaints; It is still possible to collect the remaining approximately ten million deals.
Who will pay the price for the mis-selling scandal?
The FCA said the scheme would focus on around 30 lenders, which make up around 89 per cent of the motor finance market.
The watchdog has repeatedly warned consumers that they do not need a claims management company (CMC) or a law firm to access the compensation scheme and that they could be exposed to unnecessary fees if they do so.
The regulator said consumers who think they may be entitled to compensation should contact their lender or broker if they have not already done so.
Lenders will have three months from the launch of the scheme, which will be early next year, to contact customers who have already complained and six months to contact customers who have not complained.
Mr Rathi said: “We expect all lenders to make reasonable efforts to contact customers who may be eligible and may be affected, so we certainly hope they will be able to reach as wide a group as possible within the time frames we have set.
“If someone is not contacted, they will be given one year from the start date of the scheme to complain to the lender.”
