You could be due compensation if you bought a car on finance.
Back in 2024, the Financial Conduct Authority launched a review of the car finance market to determine whether there had been widespread mis-selling of motor finance deals that had caused customers to be charged too much for car loans.
While the FCA's initial review looked at discretionary commission agreements (DCA) in particular, the outcome of a recent Supreme Court case means that other car finance deals may also be due compensation.
DCA - Car finance mis-selling review launched
Prior to January 2021, some lenders and car dealers (acting as brokers) used discretionary commission arrangements to sell potentially unfair finance deals to their customers. It meant that car dealers were able to set the interest rate charged on customers' car finance contracts. Car dealers (acting as credit brokers) and lenders were encouraged to push deals with high interest rates in order to earn higher amounts of commission. However, this was not always explained to customers. The FCA banned this practice back in 2021.
However the Financial Ombudsman (FOS), which is the independent arbitrator of financial complaints between consumers and businesses, has since been contacted by thousands of people who took out car finance prior to the ban who believe they have been treated unfairly and been overcharged. This included two complaints which were upheld by the FOS where customers were compensated.
While dealers and lenders alike have been rejecting claims and maintaining that customers haven't been treated unfairly, the Financial Conduct Authority, which regulates the car finance industry, has since stepped in to investigate the matter further and carry out a full review of "historical motor finance commission arrangements and sales across several firms".
To put the scope of the problem into context, analysis by the Car Expert shows that approximately 90% of all new cars are bought on finance every year. The average amount financed ranges between £15,500 to more than £25,000, depending on whether it's a new car or a used car. The UK car finance debt has risen by £29 billion since 2009.
It means that car finance mis-selling could potentially affect millions of consumers across the UK. Following the announcement of the car finance review, the FCA put in place new temporary complaint-handling rules for the firms affected. More details are given below.
Does the DCA car finance mis-selling review affect you?
The car finance mis-selling review may affect you if you bought a car on finance before January 28, 2021. This specifically pertains to customers who:
- Used a hire purchase agreement such as a personal contract purchase (PCP)
- Used a lender or car dealer (acting as a broker) who had a discretionary commission agreement.
However, the investigation is unlikely to affect you if you bought a car after January 28, 2021. This also won't apply to your situation if you used a hire agreement, such as a Personal Contract Hire.
Can you make a complaint if your finance deal did not include a DCA?
You may be able to make a complaint and claim compensation even if your finance deal did not include a DCA. The FCA is currently consulting on a redress scheme, and it has said it may include agreements dating back to 2007 where high commissions were paid and not disclosed appropriately. This is in light of the recent Supreme Court judgement. If the FCA chooses to do this, both DCA agreements and some non-DCA agreements could be liable for compensation due to car finance mis-selling.
If you think you might be affected by car finance mis-selling, then the new temporary complaint-handling rules might apply to you.
What are the new temporary complaint handling rules?
The FCA's temporary complaint-handling rules are now in force. They're likely to apply to you if you choose to make a complaint between now and the 4th of December 2025. They will probably also apply to you if you've made a complaint recently. These temporary complaint-handling rules apply to most car finance mis-selling complaints rather than just DCAs.
The new rules mean that businesses have longer to investigate your case and respond to you. Typically, they must get back to you with a final response within 8 weeks. This has now been extended. Firms now have until after the 4th of December 2025 to respond to queries. You, as a consumer, also have longer to contact the Ombudsman.
These rules were introduced to ensure complaints are dealt with consistently and efficiently. The FCA believes that this might not happen without the temporary complaint handling rules due to the volume of complaints. Car finance borrowing also isn't covered by the FSCS (Financial Services Compensation Scheme) which poses a further risk that if a lender goes out of business, consumers may not get the compensation they're owed. As such, these steps are designed to protect the consumer while the FCA investigates.
What to do if you want to make a complaint
If you believe you've been affected, the first step is to contact your car finance company (via email is fine) and lodge a complaint if you have not already done so. Under the FCA's temporary rules, firms have at least until the 4th of December 2025 to give customers a final response. They should, however, acknowledge your complaint within 8 weeks.
In your complaint, you should include details such as:
- Your name
- The date of the agreement
- Your address when you took out the agreement
- Details about the vehicle
- Any other pertinent details
If they fail to respond on time, or if you don't like their resolution, you can then contact the Financial Ombudsman to log your complaint. This service is free to use and you don't need to pay anyone to represent you. While you typically have 6 months from the final response date to contact the Ombudsman, under the temporary rules, this has been extended as well.
Bear in mind that in the meantime, the FCA is consulting on a redress scheme which could include both DCA deals and non-DCA deals. Should this redress scheme go ahead, the compensation process may look a little different. However, it's worth lodging your complaint now just in case.
How has the Ombudsman treated DCA arrangements previously?
Cases involving discretionary commission arrangements and car finance have already been referred to the Ombudsman and two final decisions have been published so far. One such case involved Mrs Y and Black Horse, a Lloyds-bank-owned motor finance provider.
Case study: Mrs Y vs Black Horse
Mrs Y had purchased a used car on finance. The company that sold her the car offered to arrange finance and act as a broker. Black Horse was prepared to offer Mrs Y a flat interest rate of between 2.49% and 5.5% for the car finance agreement. However, any amount above 2.49% would have resulted in a higher commission for the broker arranging the deal. The broker charged Mrs Y an interest rate of 5.5% to collect the highest commission possible. On finding out, Mrs Y complained that this was unfair and requested compensation.
The financial Ombudsman upheld Mrs Y's complaint and ordered Black Horse to pay Mrs Y compensation as a result. In making the decision, the Ombudsman claimed Black Horse had failed to act fairly and reasonably on several occasions. You can read the full decision here, including details of the compensation Mrs Y was offered.
What happens next?
The FCA has said it'll consult on a redress scheme following the outcome published by the Supreme Court earlier in August. The FCA will release more details in October. If it goes ahead with its proposed redress schemes, it expects customers will start receiving payments next year. You can find out more about how much compensation you're likely to receive and whether your case is likely to be eligible in our overview of the car finance mis-selling compensation scheme.
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