Car finance has come under the spotlight recently, as has the word ‘compensation’. The whole saga has been colloquially branded as the ‘next PPI scandal’, and depending on the outcome of an investigation by the Financial Conduct Authority (FCA), millions of people could be owed a payout. 

Here we explain more about the FCA’s new investigation into car finance. 

What's the fuss about?

The FCA announced on January 11 2024 that it was opening an investigation into cases of lenders not paying out compensation to customers who had taken out finance which included now-banned commission arrangements.

It's related to the authority's banning of commission models – called ‘discretionary commission arrangements’, or DCAs – in January 2021 that gave car finance brokers (and car dealers) an incentive to raise interest rates that a customer paid for their finance. By banning this, brokers couldn't be given extra money.

The FCA says it has received a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban.

Many motor finance firms are rejecting 'most' complaints by customers, says the FCA, because they feel as though they have not acted unfairly. The Financial Ombudsman Service (FOS) has considered some of these complaints rejected by the firms and has found in favour of complainants in two recent decisions. With the FOS ruling in favour of the complainants, it's expected many new complaints from customers to firms will now arise.

So, the FCA is using its powers to review historical motor finance commission arrangements and sales across several firms. If it finds 'widespread misconduct' and that customers have lost out, it will outline how best customers can be compensated. 

From January 11, 2024, the FCA paused the eight-week deadline for motor finance firms to provide a final response to a customer's complaint, and extended it to 37 weeks. The pause applies to complaints received by firms on or after November 17, 2023 and on or before September 25, 2024      

What does it mean?

It's possible that a dealer or broker may have persuaded you to sign up to a finance deal where they got a hidden bonus by ramping up the interest rate. You possibly weren't aware of this. And that's considered naughty. As a result you may be able to claim some of the money back.

Am I eligible?

The FCA estimates that a whopping 95% of car finance deals had some sort of a commission model, while 40% had the now banned 'discretionary commission arrangements'. The crucial element here is if the customer wasn't aware that their finance deal included a DCA, they could be entitled to some compensation. 

If the answer is 'yes' to the following points or they apply to you, you are likely to be affected...

• You bought a motor vehicle – which includes cars, vans, campervans and motorbikes – on finance.
• The finance product was taken out before January 28, 2021.

• The vehicle was used primarily for personal and not for business use. 

• The finance deal has been paid off and you now own the vehicle.

• The finance agreement was in someone else's name and they have passed away.

• You have, or had multiple car finance deals. 

Are all finance plans included?

Some of the major forms of finance agreements are included, so Personal Contract Purchases (PCP) and Hire Purchase (HP). Leasing deals are not included, nor are Personal Contract Hire (PCH) and interest-free (0% interest) finance. 

As mentioned above, this is for agreements taken out before January 28, 2021. It's unlikely that agreements made before April 6, 2007 will be included, but the FCA will likely outline this once it has finished its investigation. 

Are all finance companies under the spotlight?

This affects many, many firms – big high street names and manufacturer-branded operations, such as Barclays, Santander Consumer Finance, Black Horse, Mercedes-Benz Financial Services, Alphera, and BMW Financial Services, according to Money Saving Expert.

The website also details firms which never had discretionary commission arrangements. These are...

• Admiral

• Advantage Finance

• Autolend

• Auto Money

• Billing Finance

• Burnley Savings & Loans

• Car Loan Centre

• Carmoola

• First Response Finance

• Guardian Finance

• Lendable

• Lombard

• Mallard Finance

• MoneyBarn

• Oodle Car Finance

• Oplo

• Premium Plan

• RateSetter

• Retail Money Market

• Specialist Motor Finance

• Tandem

• Vehicle Credit

• 1st Stop Finance 

What can I do?

Money Saving Expert has a free car finance reclaim tool to allow people to simply and quickly generate an enquiry and complaint, or you can use a claims management firm, but this may be a charged service.

Essentially, though, the complaint should be lodged with the lender – not the broker or car dealer. 

How much will I be owed?

Naturally, compensation is on a case-by-case arrangement and there is no fixed sum. But all of this largely depends on the conclusion of the FCA investigation, which is scheduled to be completed by September 25, 2024, but this could be extended.  It's expected that some people will receive sums in the thousands though.