In response to the Financial Conduct Authority’s (FCA) investigation into rejected complaints over high car finance interest rates, Martin Lewis has confirmed more than 1.2 million are seeking compensation.
The FCA’s ongoing investigation is reviewing a slew of complaints made by customers who think they were charged too much on their loans before brokers were banned from adjusting interest rates in 2021. Martin Lewis launched a tool in response to the investigation – after advising that many drivers could be affected and they should look at submitting a complaint ‘as soon as possible.’
This warning came in response to the industry’s widespead use of discretionary commission arrangements between the broker and the lender. The practice incentivised brokers to increase interest rates for a higher commission. The FCA says three quarters of car loan and PCP agreements made between 2007 and 2021 would have had some form of discretionary commission model.
Both brokers and lenders rejected complaints made after the practice was banned in 2021 as they believed they acted justly and didn’t cause customers to lose out on any money.
The FCA is now reviewing the complaints to find out if anyone was unfairly charged. Martin Lewis says, ‘The numbers of complaints are beyond anything I expected, and I expected far bigger numbers than most firms did. As they hadn’t planned for this scale, it’s unsurprising many are struggling to respond in a decent time.’
It is likely that the FCA will set up a form of a ‘mass-scale redress scheme’ to help drivers deal with their claims. ‘There will be hundreds of thousands or millions of agreements and potential claims,’ an FCA spokesperson says.
Usually drivers need to complain to the Financial Ombudsman within six months, but due the sheer number of cases, this has been extended by up to 15 months, if they were sent a final response between 12 July 2023, and 20 November.
‘The pause will apply to complaints about motor finance agreements where there was a discretionary commission arrangement between the lender and the broker and will last for 37 weeks (approximately nine months),’ the FCA spokesperson adds.
How big could the payout be?
From 2007 to the end of discretionary commission arrangements in 2021, it’s thought that car finance customers may have overpaid just under £7bn.
According to analysts, the total payout could amount to as much as £13bn – a dramatic increase of around £9bn over initial estimates. Lloyds Bank, owner of Black Horse – the UK’s largest car finance provider – could be liable to pay out around £1.8bn, while other banks like Barclays and Santander may also need to indemnify car finance customers.
What could this mean for customers?
According to money-saving expert Martin Lewis, car finance refunds to HP and PCP customers could be on the same scale as the Payment Protection Insurance pay-out.
‘I’ve done back of the envelope numbers and at the top end this could be PPI type scale (that was £40bn), big enough to be a form of Quantitative easing (so real consequences for the next govt as it’ll likely take a year),’ he said.
‘The FCA wouldn’t do this unless it was likely to find they were doing it wrong. So my suspicion is when it finishes its investigation it will (in order of likelihood) set up either:
‘a) A redress scheme where it orders all the firms to pay car finance refunds to every affected customer even if they’ve not complained. b) Redress rules where it orders them to pay out redress based on a set formula, to those that complain.’
What this means for you
The FCA has said that anyone who falls into the following categories may be owed compensation:
- You used car finance to buy a car before 28 January 2021, this includes hire purchase agreements, such as Personal Contract Purchases
- Your lender and broker had a discretionary commission arrangement
The FCA has temporarily paused the car finance complaints process, meaning that if you complain now, the insurance provider may not respond within the usual eight-week deadline. However, according to Martin Lewis, customers who think they may be due compensation should get a complaint in now ‘as a marker.’
Lead photo: Money Saving Expert
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