Watchdog considers car finance scandal compensation scheme

Customers who were mis-sold car finance could be compensated without having to submit a complaint. 

Before January 2021, car dealers and brokers were able to inflate interest rates on car loans to get bigger commissions - without telling customers. 

Last October, the Court of Appeal ruled that this practice was unlawful and an appeal is set to be heard by the Supreme Court in April. 

The Financial Conduct Authority (FCA) has now confirmed that if the original ruling is upheld, it may consult on introducing a compensation scheme for those affected. 

Lenders will have to contact affected borrowers 

Any redress scheme would place the onus on lenders to get in touch with borrowers who were mis-sold finance agreements and offer compensation. 

The FCA said this would be “simpler for consumers than bringing a complaint”. 

“We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive,” the watchdog commented. 

“It would also be more orderly and efficient for firms than a complaint-led approach, contributing to a well-functioning market in the future.” 

The FCA will confirm if it plans to introduce a compensation scheme and what form this will take within six weeks of the Supreme Court’s decision. 

How were car finance customers overcharged?

In January 2024, the FCA started investigating discretionary commission arrangements (DCAs) on car loans issued between 2007 and 2021. 

DCAs helped banks and lenders providing car finance to allow dealers to set their own interest rates on repayment plans.  

This meant car dealers could undercut the bank or lenders’ preferred rate to secure a sale, or charge more so that they could earn higher commission. 

The practice was banned in 2021. 

It’s believed that DCAs cost motor finance customers an extra £1,000 in interest charges over a typical four-year repayment plan on a £10,000 loan. 

About two million new and second-hand cars are bought with finance agreements every year. 

As a result, millions of people could potentially be set to receive thousands of pounds in compensation. 

Analysts believe that the total amount paid out could reach as much as £16bn.