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 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) and were undisclosed, meaning drivers were at risk of overpaying for the loan.
Other car buyers had an unfair contract because the commission paid to the dealer was so high, accounting for at least 35% of the total cost of credit and 10% of the loan, and some were not given accurate information about getting the best finance deal because of an exclusive rights given to certain lenders.
The regulator has now proposed a scheme to compensate drivers who were subject to these arrangements. If it gets the go-ahead, once the scheme starts:
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lenders will contact those who have already complained. If they don’t hear back after one month, lenders will assume they should look at the case and pay compensation if appropriate
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those who have already complained before the scheme gets up and running are likely to receive compensation faster
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those who have not complained will be contacted by their lender within six months of the scheme starting. People will be asked if they want to opt in to the scheme to have their case reviewed. They will have six months to decide
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those motor finance borrowers who do not receive a letter, for example because lenders no longer have their details and cannot trace them, will have a year from the scheme starting to make a claim
The regulator admitted that consumers can choose not to take part in the FCA’s compensation scheme and instead go to court, where they may get more or less compensation, based on the facts of their case.
David Bott, senior partner from Bott and Co, which is representing some drivers in court, said: “The true measure of success will be whether it delivers meaningful compensation that reflects the real financial harm suffered by consumers.
“The average payout figure of £700 per agreement raises serious questions about whether the scale of redress will match the severity of wrongdoing.”
However, a lenders’ trade association gave an opposing view as to the level of compensation.
“We remain concerned that the costs are too high,” said Shanika Amarasekara, chief executive of the Finance and Leasing Association.