Are you due car finance compensation? Paul Lewis has the details

The car sales industry has been caught breaking the rules – twice – about how it sells finance for new and second-hand vehicles.

Banks have already set aside around £5 billion for possible redress payments to customers for the first breach. But a new Court of Appeal judgement could mean it’s not nearly enough. 

The mis-selling scandal has been dubbed PPI 2 – after the widespread mis-selling of payment protection insurance (PPI) in the Nineties and Noughties, which has cost the banks more than £42 billion in compensation. 

High interest, more commission

The first scandal occurred when the banks devised a scheme to reward car salespeople with a bigger rate of commission if a customer agreed to a higher rate of interest on their loan.

The bank told the dealership the lowest rate of interest it would charge a customer but provided tables that showed how much more commission it would pay if the salesperson put a higher rate of interest in the contract. 

The higher the rate, the more commission the bank paid the dealer. The loser of course was the person buying the vehicle who paid more every month for their loan.

One major high street bank agreement I’ve seen shows that if the customer signed up for an APR of 5.9%, the dealer earned no commission. However, if they paid 14.9% interest, the dealer earned £1,350 for every £10,000 the customer borrowed. 

This of course encouraged salespeople just to tell the client they had arranged finance and could secure the loan they needed at, say £250, a month. Those payments seemed affordable, so the customer agreed. Only in the documents they signed would the interest rate of 14.9% be made clear. The dealer pocketed their big commission but, of course, did not tell the customer that finance at 5.9% was possible. 

The offence was not just charging the customer more than they needed to pay. The real wrong was hiding the arrangement from the customer, because if they had been offered the honest choice they would have opted for the lowest interest rate and cut out the dealer’s commission. 

When the Financial Conduct Authority (FCA) examined these discretionary commission arrangements it estimated car dealerships and banks made £500 million a year overcharging customers by an average of £1,100 each. It banned these arrangements from 28 January 2021. Some customers challenged the banks over the lawfulness of deals made before the ban. In January last year, two cases were won at the Financial Ombudsman Service. 

Court of Appeal ruling

The FCA immediately began to work to review these arrangements and ‘urgently assess’ if redress was due to everyone who’d been secretly overcharged. But that process had barely even started when the Court of Appeal decided  in a different case that mis-selling car finance was much broader and that fixed commissions for arranging finance were also wrong if kept secret from customers.

Three customers of two different lenders had complained that hidden commission paid by the bank to the car dealership had added hundreds of pounds to the cost of the vehicle. One of the three customers paid £1,650 in hidden commission, about a quarter of the total amount borrowed. Late in September, the court ruled in their favour and in each case ordered the commission to be refunded.

No one disputed that the banks and dealerships had followed the rules laid down by the FCA for lending money. But the court held that the salespeople were acting as agents for the customer when they found them a finance deal.

That triggered what’s called a ‘fiduciary duty’, which means that an agent can only act in the best interests of their client, not themselves. Paying commissions that are secret, breaches that duty because that is in the interest of the agent not the customer.

Within days of the judgement, Lloyds Bank temporarily introduced a no-commission model for lending money via car dealerships so it could continue to help customers buy a vehicle. 

This ruling could cover almost everyone who bought a car on finance in the recent past. With around two million individuals a year buying a car that way, there are fears it could pose a threat to the survival of some lenders and dealerships.

Both banks in the Court of Appeal case have said they intend to appeal the ruling to the Supreme Court but must first get permission to do so. The FCA has urged the Supreme Court to agree to hear the case and deliver a swift judgement so that lenders and agents can be clear how they can lend money lawfully in the future.

Meanwhile, the Court of Appeal ruling is now the law and must be followed.

Claim now

That means the way is open for any individual who bought a vehicle on finance in recent years to put in a complaint and claim back the overpaid commission. Normally complaints have to be dealt with within eight weeks, but the FCA has extended that time period for claims about discretionary commission until 4 December 2025.

A similar extension may be granted for fixed commission claims following the Court of Appeal ruling. But it is worth getting the claim in now – see the ‘how to claim’ box below.

It is recommended not to use claims management companies, which will charge up to 40% of any compensation received. The FCA may set up a standard compensation scheme in the future.

There will be a long wait before there is any resolution of claims made now. But to avoid any possible defence that your claim is ‘out of time’ – a legal term for too late – make that claim now and wait patiently. That could protect your share of the billions of pounds that may be paid out in the future.