Millions of drivers could be owed compensation

The Financial Conduct Authority (FCA) has launched an investigation into whether drivers have been unfairly charged too much for loans on new and second-hand cars.

The industry watchdog has decided to see if a compensation scheme is needed to deal with alleged large-scale mis-selling of motor finance.

The investigation follows an estimated 10,000 complaints from drivers, with the FCA saying there are “many more waiting in the wings”.

Complaints surged after a clamp down in 2021 on the way car dealers and brokers earn commission on sales., with the FCA banning agreements where companies were given commission linked to the interest paid by customers because it incentivised them to increase driver’s costs.

The Financial Ombudsman Service (FOS) has also been forced to intervene in two recent cases where drivers felt they hadn’t been treated fairly by their finance provider – one being Black Horse, part of Lloyds Banking Group, and the other, Barclays Partner Finance. In both cases, the FOS found in favour of the drivers after their initial complaints were rejected by Black Horse and Barclays.

The motor finance sector is worth £50 billion a year and includes large financial institutions such as Lloyds Banking Group, Santander and Barclays.

Around 77% of drivers used finance to pay for a new or used car in 2023, down from 92% on previous years because of rising APRs.

There are four main car finance options available, including personal contract purchase (PCP) – by far the most popular – hire purchase, personal contract hire and a personal loan.

In this instance the FCA is investigating all PCP loans and is not looking at any car leasing agreements – also known as personal contact hire – taken out.

The FCA said that if it finds widespread misconduct, it will make sure those affected receive settlements in an orderly, consistent, and efficient way. If that does happen, the redress is expected to be a similar size to the PPI mis-selling scandal, with around £40 billion expected to be paid out.

What is car finance?

When you buy a new or used car, you might use a car finance agreement.

With these types of finance agreements, the driver chooses the car – usually at a dealership – who then sell the car to the finance provider. The finance provider owns the car and in return for making monthly repayments under an agreement, they allow the driver to use the car.

The three main types of finance agreement that people use are:

Hire purchase agreement or contract purchase agreement (PCP)

You hire goods and pay in instalments. At the end of the agreement, you can make the financial payment – known as a balloon payment or guaranteed minimum future value – and become the legal owner of the car. If you don’t want to take ownership, then you won’t pay the final instalment and can return the car.

Conditional sale agreement

This is like a hire purchase agreement – it essentially allows you to buy the car by paying in instalments. It differs in that there’s no expectation that you’ll buy the car outright and become the legal owner at the end of the agreement. However, most modern agreements contain the option to return the car.

Hire or lease agreement

The finance provider owns the car throughout and allows you to use it in return for payment. Ownership of the car doesn’t pass to you but remains with the hire company.

What should you do if you think you’ve been mis-sold car finance?

Talk to your finance provider or credit broker first. They need to have the chance to put things right. Usually, they must give you their final response within eight weeks. However, the FCA has put a pause on firms responding to complaints received on or after 17 November 2023 until 25 September 2024, while it investigates the problem, so you won’t hear back until after then.

How much compensation could you get for motor finance mis-selling?

It isn’t clear how much drivers will be compensated. The FCA is investigating and hasn’t reached a conclusion but has said it will “identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way.”