Millions of pounds of compensation payments are being readied by lenders after an investigation was launched into the mis-selling of car finance over more than a decade.
The issue concerns so-called discretionary commission arrangements (DCAs), sold between 2007 and 2020, that allowed dealers and brokers to adjust lenders’ interest rates to reward themselves with commission payments on hire purchase and personal contract purchase deals.
The Financial Conduct Authority (FCA), which launched the probe, believes that up to three-quarters of deals were on a DCA basis. Up to 10,000 customers had complained about DCAs and two cases had been upheld by the time the FCA called a halt to more appeals while it investigates.
The ongoing probe bears resemblance to the PPI scandal in which lenders have so far paid around £38 billion to over 38 million people who were affected between the early 1990s and 2010.
“If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way,” the FCA said at the time.
Experts say the FCA’s action suggests the authority suspects lenders may have a case to answer, causing those who believe they are exposed to begin preparing for its next statement in September, when the FCA will explain how consumers can make claims against lenders.
Among those gearing up for the worst is Lloyds, owner of Black Horse, a leading lender of car finance and believed to be most exposed. In February, it revealed it has set aside £450m to cover legal expenses and compensation payouts.
Lender Close Brothers has also confirmed that it is scrapping dividend payments this year as a precaution.
Lenders’ fears and the FCA’s decision to investigate DCAs stem partly from the two claims made by customers and upheld by the Financial Ombudsman.
In one of them, Black Horse was found to have allowed a dealer to set an interest rate between 2.49% and 5.5%, with anything over 2.49% being paid to the dealer as commission. The dealer charged the highest rate of 5.5%, amounting to half of the customer’s total interest bill on the loan.
In addition, the dealer did not tell the customer it had set the interest rate and how much commission it had earned.
The Ombudsman ruled that the dealer’s actions were unfair and ordered that the customer be refunded the interest charged above 2.49% plus paid interest at 8% per year on each overpayment.
Join the debate
Add your comment
I find this hard to fathom - this is surely just business?? Nobody was forcing these customers to buy the cars? They had every option to buy somwhere else?
Every dealer will have the price of the car, the price of the finance, and the price of the extras?
It seems bizarre to me - that people who were satisfied with these deals at the time - now feel "wronged" becuase the dealers made some money from the deals?
Like that is the whole point of business - negotiate your deal - if your happy - sign. If not, walk away?
Makes me laugh that in the several occasions I've contacted the Financial Ombudsman with a complaint that has proof and evidence of wrong-doing to back it up, the company I've complained about has still been let of the hook by the toothless Ombudsman.
Yet something like this where someone knowingly signs on the dotted line for the interest rates and amounts shown, is upheld.
Makes you wonder what's going on.
Compensation culture yet again, but is it fair? No matter how the dealer apportions the charges for credit, surely the onus is on the car purchaser to decide whether the rate is fair, if they can afford it, how it compares to other forms of borrowing etc? No-one is forcing you to buy a vehicle, where did common sense and actually taking responsibility for your own decisions go? We all know that these payouts will be paid for by the rest of us in the form of higher charges, less favourable future rates and all the rest.
Totally agree. We dont know how a deal is worked out by a dealer, and no one is forced to use their finance. Nor do we know what profit is made by most business, and as you say, no doubt rates will be worse in the future as the banks try to get back the lost money from future buyers.
I really dis like the 'something for nothing' part of our society, and this will just make it worse