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 but this was not 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 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 now stepped in to investigate the matter further and carry out a full review of "historical motor finance commission arrangements and sales across several firms".
Commenting on the impending review, Chief Ombudsman Abby Thomas said "We've heard from more than 10,000 people who fear they were charged too much for their finance, and we know many more are waiting in the wings. We've resolved two complaints where we found that the way the commission arrangement between the lender and the car dealer worked was unfair on the consumer...That's why I welcome the Financial Conduct Authority's decision to assess this further."
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 and has the hallmarks and potential scale of the PPI mis-selling scandal. Following the announcement of the car finance review the FCA has put in place new temporary complaint handling rules for the firms affected. More details are given below.
Does the 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.
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 have made a complaint to your car dealer or lender after November 17, 2023.
- You plan on making a complaint to your car dealer or lender before September 25, 2024.
- You received a final response to your complaint from the dealer (acting as a broker) or lender at some point after July 12, 2023; the cut off date for final responses is November 20, 2024.
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 to 45 weeks for complaints that fall within the date ranges outlined above.
You, as a consumer, also have longer to contact the Ombudsman. Typically, you have 6 months from receiving a final response to file a complaint with the Ombudsman. This has now been extended to 15 months for complaints that fall within the date ranges outlined above.
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 find out if a discretionary commission arrangement was used on your car finance, along with full details of the arrangement if it existed. If such an arrangement existed then you can potentially lodge a complaint.
You need to give them the opportunity to investigate and resolve your complaint. Under the new rules, they have 45 weeks to issue a final response, so it's best to get your complaint in sooner rather than later.
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 to 15 months for certain complaints.
In your complaint, you'll need to tell the Ombudsman what you're unhappy about and what losses you believe you've incurred. To help your case, you'll need to provide evidence which can include things like:
- The credit agreement you received
- Pre-contract information
- Initial Disclosure Document (IDD)
You're free to include other documentation as well. A full list is available via the Financial Ombudsman Service. If you don't have some of these documents, the Ombudsman can still look at your case.
What to do if your complaint was rejected by the broker
Many customers' car finance mis-selling complaints were rejected by their lenders or brokers/dealers on the basis that they believed they hadn't treated them unfairly. If you're at the end of the road with your lender or broker, then it might be time to refer your complaint to the Financial Ombudsman. You can do this if you have received a final response or if you have been told to refer the matter to the Ombudsman by your broker. As the case study below illustrates, people who have done this before have had success.
Case study: Mrs Y vs Black Horse
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.
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?
If the Financial Conduct Authority's review finds that there has been widespread misconduct which has led to consumers losing out, they'll work out a way to ensure customers receive compensation in a consistent way across the board. The FCA has said it will outline the next steps on this issue by September 24, 2024 at the latest.
This story is still developing. If you're affected, bookmark this tab and check back often as we'll update with the latest information and guidance as it becomes available.
