Car Finance Compensation - What It's All About

Drivers who bought cars on finance could be entitled to nearly £1,000 each as part of one of Britain’s largest ever compensation schemes. It follows a series of court rulings which means that the compensation, will be much lower than had been previously discussed. Adam Shaw here is to explain.

Q: So why are people entitled to £1,000?

This is about how people were sold loans to pay for cars. And that’s a lot of people. 90% of cars are bought on finance. A total 31.7m motor finance agreements, for personal contract purchase and hire purchase of cars, were issued between 2007 and 2021

So, this is hugely important for the whole industry.

There were complaints that these loans were effectively mis-sold and that has been going through investigations by the FCA and various courts.

At first the courts said the car loans had effectively been mis-sold and the industry would have to cough up around £44 billion to compensate customers. But then the Supreme Court overturned that ruling.

But that doesn't mean that motoristy will get nothing. Because on Sunday, the FCA (the city regulator) said many motorists could still get around £950 in compensation.

That's much less than was previously expected and more than halved the compensation bill from £44bn to between £9bn and £18bn.

There has been some understandable confusion. Partly because the moment the court said that they found compensation shouldn’t be paid, the City regulator, the FCA announced it would be looking into how much compensation should be paid, which seemed to contradict the court finding.

It does at first sound like Dr. Doolittle’s Pushmi-Pullyu" animal which had two heads facing opposite directions pulling in opposite directions.

So what is happening and why the apparent conflict of statements?

The reason for the confusion is that there are TWO types of car finance mis-selling being looked at.

1. Commission Disclosure complaints. These are based on claim that if car finance agreements didn't tell consumers all details of commission, they were unlawful. This linked to whether sales agents had a fidicuary duty to consumers. The Supreme Court found they didn’t and the loans were generally legal with some wiggle room where the loans were deemed to be exceptionally poor value.

2. Discretionary Commission Arrangements (DCAs). This applies to car finance deals where brokers and dealers could increase the amount of interest they charged customers (without telling them) in order to increase their commission.

So while the court decision largely related to the 1st issue, the FCA was looking at the 2nd issue and had put it’s decision on hold until it heard from the supreme court.

Rather poor communication by both the FCA and the Supreme court have led to this confusion.

Q: So what will happen now?

The FCA has now said it will publish a consultation on what a redress scheme will cover by October 2025. The consultation will run for six weeks and people mght get ;ay uts next year.

The scheme will probably cover finance agreements going back to 2007

Q: Do customers have to do anything?

The FCA has not yet decided which approach to take. It expects lenders would be expected to make borrowers aware of the scheme - so the emphasis is on the car company to do all the running.

But there is probably no harm in making a complaint now. That should be made to the lender that provided the car finance. This is the firm you actually paid each month – not the broker/car dealer.

MSE has a form letter that you can use here

Q: How do they calculate what the compensation should be?

This could be the difference between the lowest rate you could have got and what you were actually charged. In fixed commission cases, but it is not entirely clear the calculation yet.

Q; What about the adverts for claims management firms?

There should be no need to do this. The FCA has said it aims to make any scheme easy to participate in, without needing to use a claims management company. Using a 3rd party like that, could end up costing you up to 30% in fees of any compensation. So it doesn't seem worthwhile.

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