Car finance mis-selling: what’s really going on?

There’s been a lot of news in the media over the last month about car finance mis-selling, with phrases like “the next PPI scandal” being thrown around along with suggestions of compensation payouts totalling billions of pounds. But what’s the real story?

A lot of the media coverage in recent weeks has been unhelpful in explaining what’s currently going on, why the government regulator is investigating the car finance sector, which customers may be affected and what the implications are. This article will hopefully help to answer a lot of the questions that people have been asking.

What’s the problem with car finance mis-selling?

Last month, the UK government’s financial regulator, the Financial Conduct Authority (FCA), announced that it was conducting an investigation into a particular aspect of historic car finance agreements. These are called Discretionary Commission Agreements (DCAs), which were banned in 2021.

The reason that the FCA banned these types of agreements was that it felt that they were not transparent or fair to consumers. 

However, customers (and their lawyers) felt that there was a case to be made that simply banning these agreements wasn’t enough, and that they had been ripped off by car dealers and car finance companies. There have been complaints, the Ombudsman has ruled in favour of customers on two occasions recently, and the regulator has now stepped in to try and sort it all out.

What’s a Discretionary Credit Agreement?

Prior to 2021, certain car finance agreements allowed a broker (usually a car dealer) to manipulate the interest rate offered by the finance company, increasing or decreasing the customer’s monthly payments. In practice, there wasn’t really any decreasing, only increasing.

Car finance is a fairly complex process most of the time. The customer buys a car from a dealer, and will usually apply for finance to pay for the car. The dealer doesn’t lend the customer money, instead acting as a broker for a car finance company (the lender). The lender pays the dealer for the car, the dealer hands the car over to you and then you pay back the lender over a period of years. The lender also pays the dealer a commission for arranging the loan.

The dealer collects all of your personal information, along with the car price and details, and submits an application on your behalf to the finance company. The lender then indicates that it would approve a finance agreement on particular terms, including a given interest rate. The dealer then tells you that you’ve been approved and you sign all the relevant documents so you can take home your car.

With a DCA, there was an additional – hidden – step involved. The finance company would indicate its approval at (say) 7% interest. But rather than telling you that the lender had approved your application at that rate, the dealer would then have the ability to jack up that interest rate to (say) 10% without telling you, thereby significantly increasing your monthly payment.

The dealer would receive additional commission from the lender for doing this, so both the dealer and the finance company were profiting from this activity.

As I just mentioned, the dealer doesn’t lend you the money. So it’s rather unfair that the dealer should be able to manipulate the finance company’s offer at a significant additional cost to you.

The complaints mount up

Over the last couple of years, the FCA says that the finance companies have received about 10,000 complaints about these agreements but almost all of them were rejected. A couple of customers, however, took their finance companies to the Financial Ombudsman Service and won their cases. This resulted in compensation payments of around £1,000. 

These cases grabbed the FCA’s attention, and also potentially opened the door for thousands of other customers to seek similar compensation as a precedent had now been set. In order to properly investigate and prevent a stampede of claims, the FCA has paused the complaints process while it looks into the situation properly. So until the FCA completes its investigation, you can’t file a complaint against your finance company on this matter. 

Consumer advice personality Martin Lewis, who has a huge following in the UK, then started talking about the issue on television and online, encouraging people to take action even if they’re not sure whether they ever had a DCA-type finance contract. It’s reported that around 700,000 people went to his website to lodge their complaints immediately, which will probably give Mr Lewis a lovely new list of names, email address and phone numbers for him to market to, but won’t actually improve your chances of getting compensation if you do end up being due any.

What sort of car finance agreements may be eligible for compensation?

Finance agreements with DCAs were usually used car finance agreements, in the form of a hire purchase (HP) or personal contract purchase (PCP), and generally arranged by the dealer who sold you the car. The dealer may have been a franchised or ‘main’ dealer – one that represents a car manufacturer – or an independent dealer. Whether a small or large dealer, and regardless of the price of the car, the principle is the same.

There won’t be many new car finance agreements that would have had discretionary commission, as new car finance deals tend to be advertised offers at promotional rates. That means you’d either be approved or declined at the advertised rate and the dealer wouldn’t have the ability to change the interest rate.

There may be some cases where a DCA was present on a new car finance agreement, but the number of customers are likely to be small compared to used car buyers.

How do I know if my car finance agreement had a DCA?

The contract paperwork is unlikely to mention that the agreement included discretionary commission, so don’t be surprised if you can’t see it in the contract. 

Almost all car finance contracts include a commission to the broker (the dealer), which is perfectly legal and entirely reasonable assuming it’s declared correctly. So just because there’s some small print that confirms that the dealer receives remuneration for arranging the finance, doesn’t mean it’s a DCA. 

You can contact your car finance lender (not the dealer where you bought the car) and ask them. They are obliged to tell you if your finance agreement had a discretionary credit provision. You can contact the lender in writing or by phone – writing is always better, as then you get a written response, but it’s not necessary.

What if I don’t have my finance contract?

Don’t worry if you don’t have the contract paperwork. You don’t need it. You can contact the finance company and go through the usual security questions to identify yourself, and they should be able to pull up your contract details for you.

Are all DCA agreements affected?

No, not necessarily. Just because your car finance agreement had a provision for discretionary commission, doesn’t mean that the dealer automatically jacked up your interest rate. 

As a rule, dealers would put the rate up if they thought you could afford it. If they suspected that you were already pushing the limits of affordability, they may have chosen not to try and squeeze you for any more.

It’s also possible that some dealers had a working moral compass and chose not to add extra cost to your payments because it was poor practice. It’s also possible that pigs fly and there are pots of gold at the end of every rainbow…

How do I make a claim for compensation?

Right now, you can’t. The FCA has paused the complaints process for DCA agreements while it conducts an industry-wide investigation into the process. This is expected to take until the end of September, so you won’t be able to lodge a complaint or claim until the FCA decides how it wants to proceed.

You can certainly contact your finance company right now to ask whether you had a discretionary commission agreement, either in writing or on the phone. This also won’t prevent you from pursuing the matter later once the FCA makes its decision.

Should I sign up to celebrity campaigns or class actions?

You don’t need to do this right now. What will happen in terms of claiming will depend on what the FCA decides after it completes its investigation.

If the FCA decides there’s a systemic problem

If the FCA decides that industry-wide redress is needed for DCA agreements, it will put a claims process in place for finance companies to follow and for any customers to use. It will be free, so you won’t need to pay lawyers any money. There will also be a clear time limit for making claims (the FCA has indicated 15 months), so you will have plenty of time to make a complaint and there’s no need to be at the front of the queue.

Signing onto any class action campaigns won’t increase your chances of getting any money (or any more money than the FCA’s own process).

The same applies to Martin Lewis or anyone else that claims to be acting in your interests. When the time comes, all they’re going to do is direct you to the FCA process for making a claim. 

If the FCA decides there’s no systemic problem

It’s still possible that the FCA may decide that this is not an industry-wide problem, but rather something that’s limited to specific lenders and dealers. That seems unlikely, given the steps already taken, but it will depend on what the regulator finds and what it thinks it can prove.

If the FCA decides that it’s not an industry-wide problem, then your chances of getting compensation will be significantly less. You’ll still be able to take your case to the Financial Ombudsman or a county court if you think you have been mis-sold, but that will require significant time and probably legal assistance, which means significant money as well.

In this situation, we’re likely to see class actions launched at specific lenders, which you’ll be able to join if you wish and you have a qualifying finance agreement.

The FCA has indicated it will allow complaints to the Ombudsman to be referred for 15 months after the finance company’s decision, rather than the usual six-month limit. Bear in mind, however, that even if you win, your costs may eat up most of whatever you need up being awarded.

What happens next?

This issue will continue to evolve as the FCA proceeds with its investigation. There’s unlikely to be any official news for a while yet – the FCA has indicated it will set out its next steps in Q3 2024, so that’s at least July. So anything you read or hear in the meantime is likely to be speculation.

The pause on handling customer complaints runs through until the end of September, so we’re unlikely to see the FCA making its final decision before that time.

As more news on this issue arises, we’ll bring you more information and analysis.