The FCA estimates more than four in 10 car finance agreements over a 17-year period were mis-sold.
Millions of UK car buyers could be set to be awarded hundreds of pounds in the biggest compensation scheme since the mis-selling of payment protection insurance.
Earlier this week, the city watchdog, the Financial Conduct Authority, announced proposals for a redress scheme of more than £8 billion for people who were mis-sold car finance. Compensation payouts on around 14 million unfair motor finance deals could start as early as next year, at an average of about £700 each, under the UK financial watchdog’s proposed scheme.
Money saving expert Martin Lewis previously branded the scheme ‘the biggest one we’ve seen since PPI”.
With so many people believed to be affected, it has left many desperate to know more details. Why is it being launched, and could you be in line for a financial reward?
Why are firms on the hook for car finance compensation at all?
It goes back to the information car buyers were given—or more importantly, not given—when they bought a vehicle on finance, specifically Hire Purchase (HP) or Personal Contract Purchase (PCP), reports The Mirror.
The broker who arranged the finance agreement—often the car dealer—typically earned a commission from the lender for doing so. However, the controversy centres on whether that payment was disclosed to buyers at the time, whether it was excessive, and if it affected the cost of the loan in terms of the interest rate they were charged.
The Financial Conduct Authority found motor finance companies broke the law and regulations in force at the time by failing to disclose this important information. “This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan,” it said.
What has the FCA announced about
An industry-wide compensation scheme. They are proposals at this stage and could yet change based on feedback. However, the plan is for the scheme to be operational early next year. Consumer champion Martin Lewis, of MoneySavingExpert, said: “What really made me raise my eyebrows is that the way it’s going to be paid out is by far the simplest form of redress scheme we’ve seen, never mind for one of this scale.”
Am I eligible for
The scheme would cover many motor finance agreements taken out between April 6, 2007, and November 1, 2024, where commission was paid by the lender to the broker. Of the 32 million car finance agreements in that time, the FCA believes more than 14 million were likely mis-sold. It applies to both new cars and second-hand cars. And it is possible that people took out more than one loan during that entire period, allowing them to receive multiple payouts. Buyers who have taken out around four million loan agreements between them have already made complaints, meaning that another 10 million have yet to engage in the process so far.
How much
The FCA is estimating average payments of around £700 per agreement. That average includes some lower amounts, but in the case of a much smaller number of people – approximately 13,500 – it could be significantly higher because, for instance, the commission paid was perceived as particularly excessive.
The regulator has estimated the total compensation at £8.2 billion. It is less than the £9billion to £18billion it had originally estimated, but would still be one of the financial sector’s biggest compensation schemes. The £8.2billion figure is based on 85% of eligible claimants getting money. If all 100% did, then the amount could be £9.7 billion. Experts believe firms will have to bear a further £2.8 billion in costs, bringing the total industry costs to around £11 billion.
What should I do about
Sit tight while the FCA finalises the details of the scheme. Its consultation closes next month. Crucially, what is being proposed would be free for consumers. It follows concerns over the role of claims management companies, given that some can take a big chunk of any payout. It emphasised that people can submit their own complaints using a template letter available on the FCA’s website. And it added: “Those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed. “
How will the
Once the proposed scheme goes live, lenders will be expected to contact those who have already complained they were mis-sold car finance, around four million. If they don’t hear back after one month, lenders will be expected to review the case. Those who have not complained should be contacted by their lender within six months of the scheme starting. They will be asked if they want to opt in to the scheme.
If they have already signed up with a claims management company, they can opt out and use the free scheme. However, they may be hit with an exit fee. The FCA is keen to stress that any such fees must not be excessive and has put the firms on warning.
It is possible that those who are eligible for compensation may not receive a letter, for example, because lenders no longer have their details and can’t trace them. In that case, they will have a year from the start of the scheme to make a claim. They will be able to do so by making a claim directly to their lender.
If they don’t know who their lender was, the FCA says there will be information on how to check on its website. The watchdog is also planning an advertising campaign to raise awareness of the scheme.
I bought a car on finance, but how do I know if I was missold it and am due
Compensation will only be due if buyers were not told about at least one of three arrangements that were in place between the lender and the broker or dealer.
1. The first is the one that has been talked about a lot and will apply to the most people.
It involves a “discretionary commission arrangement”, which allowed the broker – or ca dealer – to alter the interest rate the customer would pay so that they could end up pocketing higher commission, even though that meant the buyer shelled out more in interest payments.
2. This involves unfairly high commission. The FCA believes it applies to 2.9 million cases. It is where the amount of commission was both more than 35% of the total cost of the credit and over 10% of the amount borrowed by the buyer.
3. The last is where the dealer was contractually tied, or where they didn’t shop around for the best deal for the buyer.
How is the
The FCA believes consumers should be compensated for the average amount it estimates they have overpaid or lost, plus the commission paid, plus interest. It will examine the difference in interest rates charged on loans with discretionary commission arrangements compared to those with flat fee arrangements. For example, if someone was charged an interest rate of 10% on the finance they took out, where undisclosed commission was paid, but the likely rate would have been 8.3% otherwise, then the loss was the difference.
Martin Lewis explains: “It will be roughly 17% of the interest. So for every £1,000 of interest you were charged, you’ll get back £170 – and that’s being done on average. It’s not a case-by-case basis, so some people may be worse off because of this, some people will be slightly better off because of this.”