Consumer champion Martyn James explains everything you need to know about the car finance scandal, as millions of drivers are owed compensation
Ever wonder how so many people on the road are driving around in super posh vehicles?
Well in the vast majority of cases, they don’t technically own the cars outright. They’ve taken out car finance to “buy” them. However, many of these vehicles may have been mis-sold, which means if you bought a car between 2007 and 2024, you could be entitled to £700 on average in compensation.
This could potentially cost the industry £8.2 billion – a huge sum, but less than was first feared. But how did we get here? Who’s entitled? And how do you get started? Here’s my guide.
What are the key things that I need to know?
The regulator of the financial services industry, the Financial Conduct Authority (FCA) has announced proposals for a compensation scheme for millions of drivers who may have been mis-sold their car finance deals.
The mis-selling itself is rather complex – check out my plain English guide below. But bear in mind these are proposals – things could still change. The main things to remember are:
- You would need to have been sold a motor finance agreement taken out between April 6, 2007 and November 1, 2024.
- The compensation scheme only applies if you were sold an unfair contract, given inaccurate information or excessive commission was paid by the lender to the broker.
- It’s estimated that the scheme will apply to just under half of people (44%) who were sold policies during this period.
- The FCA estimates that equates to 14.2 million people.
- Lenders could pay out £8.2billion in compensation.
- The average payout is predicted to be £700 – but that sum will very much vary depending on the circumstances.
What’s the problem with car and vehicle finance?
If you’ve bought a car or vehicle in the past decade, chances are you’ve taken out a Personal Contract Plan (PCP). In 2023 alone, £52 billion was lent to people to fund purchases of both old and new vehicles. It’s estimated that around 2 million people take out these deals each year. Car and vehicle finance is big business.
However, these finance agreements are ludicrously complicated – and there are various ways you could have been mis-sold your finance deal (or add-on contracts like insurance too).
What’s the problem with commission?
Back in 2021, the FCA banned a type of “discretionary commission” on motor vehicle agreements. Discretionary commission worked by allowing the dealer to increase the amount of interest you paid on your loan to boost their commission. The FCA estimated around 924,000 customers were paying £500 million in additional interest every year.
Because the FCA had already found that this was unfair, it is proposing to introduce a compensation scheme for those affected. This had to be delayed because the highest court in the UK was considering a legal case about this very subject.
Commission terms
You don’t need to know how all of this works to claim! But if you’re interested, here are the term to look out for:
- A discretionary commission arrangement , which allowed the broker (car seller) to adjust the interest rate you paid to obtain a higher commission.
- A high commission arrangement. This is the subject of the court case that won at the Supreme Court. In other words, where the amount of commission was so high it was deeply unfair. The FCA has set this limit at a rate of 35% of the total cost of credit and 10% of the loan.
- A “tied” agreement. This is where the lender and broker had an agreement to exclusively or mostly sell agreements with the lender but failed to tell you this.
How do I claim?
First things first, you don’t need to know or understand the nuts and bolts of any of this to make a claim! All that matters is if you were sold a motor finance agreement taken out between 06 April 2007 and 01 November 2024. I spoke to my mate and fellow Rip Off Britain expert, Alex Neill, for her tips on complaining about car finance. Alex says:
- If you’re one of the four million people who’ve already complained, you will be contacted first once the scheme starts. You will be automatically included, unless you contact the lender to say otherwise. If they don’t respond within one month, lenders must review their cases automatically.
- Those who haven’t complained will be contacted within six months of the scheme launch and asked if they wish to opt in. You’ll then have six months to decide.
- Uncontacted consumers – for example, if lenders no longer hold their contact details – will have 12 months to make a claim directly.
- If consumers disagree with their lender’s decision, they can escalate their case to the Financial Ombudsman Service.
- The FCA expects 85% of eligible consumers to take part. At that level of participation, lenders would owe around £8.2 billion in redress. If all eligible consumers claimed, payouts could rise to £9.7 billion; if only 70% participated, total redress would fall to around £6.8 billion.
Other things to bear in mind
If you’ve not been contacted, now is the time to start digging around in the back of your drawers to find your old agreements. If you are struggling to find them, your credit reference report may list old deals and bank statements could help you figure out who the lenders were.
If you’ve already been compensated, or the Financial Ombudsman or lender rejected your claim, you should be contacted if you are entitled to further compensation.
You can find out information, get updates and download template letters on free websites like Consumer Voice and MoneySavingExpert.
Do I need to use claims management companies and solicitor firms?
Claims management companies, or CMCs, are firms that will bring complaints or claims on your behalf for a fee. Remember the PPI mis-selling scandal?
CMCs made BILLIONS off charging excessive fees of up to 40% of winnings for doing precisely nothing more than getting you to fill in a form that you’d have had to do anyway if you made the complaint yourself.
The FCA is so concerned about hundreds of these firms aggressively targeting people to make motor finance claims on their behalf it’s issued a series of warnings and is taking action against the industry and many firms individually. Do. Not. Sign. Up.
If you already have and you feel you were misled, then make a complaint. But you could also ask if there’s an exit fee to get out of the contract, which might be more affordable. There’s also the free Claims Management Ombudsman you can contact if you’re unhappy.
Scam warning!
One last warning! I was taking part in my weekly consumer clinic on BBC Radio Scotland when presenter Connie McLaughlin told me she’d received a ridiculously convincing email from a firm that looked just like the lender she had complained to, asking for her bank details. It was a fake.
Watch out for fraudulent emails, texts and even phone calls. Only complain to your lender and don’t ever click on links from them, the FCA, ombudsman or anyone else. Only go through the official websites or phone lines to pursue a claim.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.