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Car finance: What's behind the mis-selling complaints? Car finance: What's behind the mis-selling complaints?
(2 days later)
Millions of motorists have been denied a path to claim compensation for hidden commissions paid on car loans following a Supreme Court ruling. A compensation scheme over car finance mis-selling has been proposed by the financial regulator.
The UK's highest court sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other credit providers to car dealers. It comes after a Supreme Court ruling on Friday, that sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other credit providers to car dealers.
The decision reversed earlier rulings by the Court of Appeal that had opened the possibility of industry-wide claims for compensation from motorists. The judgement means millions of motorists will not be able to claim, but it left open the possibility of compensation claims for drivers who were subject to particularly large commission charges - which the Supreme Court said were unfair.
Some could still be in line for payouts, but questions remain who or how many will be eligible. The Financial Conduct Authority (FCA) has now said it will consult on running a payout scheme.
What's the scandal about?What's the scandal about?
The vast majority of new cars, and many second-hand ones, are bought with finance agreements.The vast majority of new cars, and many second-hand ones, are bought with finance agreements.
About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.
In 2021, the City regulator, the Financial Conduct Authority (FCA), banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs). In 2021, the FCA banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs).
The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.
Since January, it has been considering whether compensation should be paid to people with these deals before 2021.Since January, it has been considering whether compensation should be paid to people with these deals before 2021.
Any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts, were effectively on hold until a Supreme Court's ruling. Any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts, were effectively on hold until Friday's Supreme Court ruling.
The Supreme Court considered three test cases. The cases focused on whether commission payments made by finance companies to dealers, of which the car buyers were unaware, amounted to bribery - and whether the car dealers themselves had a duty to act on behalf of their customers, rather than in their own interests.The Supreme Court considered three test cases. The cases focused on whether commission payments made by finance companies to dealers, of which the car buyers were unaware, amounted to bribery - and whether the car dealers themselves had a duty to act on behalf of their customers, rather than in their own interests.
If upheld, this could have paved the way for millions to claim compensation, but the court ruled against two of the test cases, siding with finance companies. If it had been upheld, this could have paved the way for millions to claim compensation, but the court ruled against two of the test cases, siding with finance companies.
This has narrowed the scope of people who will be able to claim compensation.This has narrowed the scope of people who will be able to claim compensation.
Who could still be in line for payouts? How much could victims receive, and when?
Potentially, millions of motorists could still receive payouts, depending on how their interest rate was set and what they knew about it. Those who had a finance deal, which had a DCA, before 28 January 2021 could receive compensation. The consultation on who should be eligible and how much they should receive will begin in October, with the first payments expected next year, the FCA said.
Were this to go ahead, it would be organised centrally by the Financial Conduct Authority (FCA), which would contact motorists directly instead them having to apply. Victims are likely receive less than £950 per deal under the proposed compensation scheme, the regulator said.
The FCA has advised against signing up with third-parties offering to help with compensation claims that can take a cut of the compensation. It says that the total estimated cost of the redress will be between £9bn and £18bn.
This would require firms to check if customers had lost out, but would mean all those affected would be automatically compensated. The authority says it is "hard to estimate precisely at this stage the total cost to industry of the scheme", but millions of consumers could be eligible.
This compensation will now not be as wide as it might have been following the outcome of the Supreme Court decision. It added that the amount of money victims receive will depend on the "degree of harm suffered by the consumer and the need to ensure consumers continue to be able to access affordable loans for motor vehicles".
Guidance from the FCA revealed that any compensation scheme would have to be fair to consumers but not collapse the car market. Those who have already complained do not need to do anything, the regulator said, advising those who have yet to complain to contact their car loan provider rather than using a claims management company.
The FCA said it would confirm on 4 August whether it would "consult on a redress scheme". It added that it "anticipate[s] requiring firms as far as possible to make customers aware they may be eligible and what they may need to do" and that claims "should cover agreements dating back to 2007".
"Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well," it said. Who would foot the bill?
How much could they receive? The industry is expected to cover the full costs of any potential compensation scheme, including any administrative costs.
That is far from clear yet, but lenders – including some of the UK's biggest banks – have set aside billions of pounds already. Lenders - including some of the UK's biggest banks and specialist motor finance firms - have set aside more than £2bn for potential payouts already.
A driver would likely receive the difference between the amount they paid at an inflated interest rate and the rate they should have been charged.
Interest of 8% on the overpayment would be added to that loss, which could significantly increase the payout.
Exact amounts would depend on individual circumstances.
Lenders including major banks and specialist motor finance firms have set aside a total of more than £2bn for potential payouts.
Lloyds Bank has put aside £1.15bn, and Santander has allocated £295m.Lloyds Bank has put aside £1.15bn, and Santander has allocated £295m.
Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m). Some of that money has been earmarked to cover legal and administrative costs.Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m). Some of that money has been earmarked to cover legal and administrative costs.
The Financial Conduct Authority has said any redress scheme would need to balance fairness to consumers who lost out, with ensuring the motor finance market remains robust. The FCA says any redress scheme would need to balance fairness to consumers who lost out, with ensuring "the integrity of the motor finance market, so it works well for future consumers".
When could a compensation scheme begin? What was the case that succeeded in the Supreme Court?
Whether there will be a compensation scheme for people who had an unfair DCA before 2021 will be announced on Monday, 4 August.
But the FCA says it will take time to come up with clear criteria on which DCAs are unfair and which are not.
"We're looking at those arrangements that were in place at the time, before 2021, to see what may have been unfair," Nikhil Rathi, the watchdog's chief executive, told the BBC.
"And if we feel that consumers have lost out, we will make sure that we consult on a scheme and move quickly."
That consultation will take a few months and involve consumer groups, Parliament and "everybody who has an interest", he said.
But Mr Rathi said any compensation scheme would be up and running by next year.
Is this a wider issue?
A decision by judges at the Court of Appeal at the end of last year blew open the ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds.
But that is not the case anymore.
While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the initial Court of Appeal decision widened the scope to any car finance commissions.
The Supreme Court ruling means now that the scale of compensation payouts will be limited, but the fate for those who had DCA loans remains uncertain.
The decision on any payouts over the DCA loans lies with the FCA.
Martin Lewis, founder of Money Saving Expert, told the BBC he would be "gobsmacked" if there was not a scheme for DCA payments.
The test case involved Marcus Johnson, 34, who bought a Suzuki SwiftThe test case involved Marcus Johnson, 34, who bought a Suzuki Swift
The one test case which was upheld by the Supreme Court was that of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car - a Suzuki Swift - in 2017. On Friday, the Supreme Court reversed earlier court rulings in three test cases which said that hidden commissions on car loans were unlawful.
The one test case which was upheld was that of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car - a Suzuki Swift - in 2017.
He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.
"I signed a few documents and then drove away in the car," he told the BBC."I signed a few documents and then drove away in the car," he told the BBC.
He said he had no option but to use finance when he bought the car, describing it as "heartbreaking" to find out so much extra money had been taken.He said he had no option but to use finance when he bought the car, describing it as "heartbreaking" to find out so much extra money had been taken.
Mr Johnson said he was "pleased for myself" that his case was won, "but not for the hundreds of others" who will miss out. "It's a win, but it's a really big bag of salt to go with it."Mr Johnson said he was "pleased for myself" that his case was won, "but not for the hundreds of others" who will miss out. "It's a win, but it's a really big bag of salt to go with it."
In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he was appeared to have been misled over the relationship between the finance firm and the dealer.In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he was appeared to have been misled over the relationship between the finance firm and the dealer.
That could provide a template for other people to put forward claims. The FCA said Friday's judgement "helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts".