What’s behind the mis-selling complaints?

An official compensation scheme is likely to be set up for people mis-sold finance agreements when buying cars, if widespread failings are found.

The City regulator, the Financial Conduct Authority (FCA), said it would set up a industry-wide redress scheme if it concluded mis-selling occurred.

A decision by judges at the Court of Appeal has blown open the ongoing saga into hidden commission payments, with buyers possibly in line for payouts totalling billions of pounds.

But the higher Supreme Court will soon hear an appeal against the decision.

Lawyers acting for motorists say this could further delay compensation which should be paid to car buyers who may not have given their informed consent for the commission payments.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

In a complicated, and long-running, series of developments, many of these agreements have come under scrutiny.

In 2021, the FCA banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. It said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate.

Since January, it has been considering whether compensation should be paid to people with these deals before 2021.

That has created the prospect of banks and other lenders having to make payouts totalling millions of pounds.

This would likely be done through a central scheme, which would be simpler for consumers than filing a legal complaint and would require firms to check if customers had lost out.

Last month, a decision at the Court of Appeal broadened the net of those who could receive compensation, potentially increasing the lenders’ final bill to billions of pounds.

While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the Court of Appeal decision widened the scope to any car finance commissions.

The three judges unanimously agreed that it would be illegal for the lender to pay any commission to the dealer without the informed consent of the buyer.

In other words, customers should be clearly told how much commission would be paid, and agree to it, without those details being buried in the terms and conditions of the loan.

The hearing included the test case of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car – a Suzuki Swift – in 2017.

He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.

“I signed a few documents and then drove away in the car,” he told the BBC.

He said he had no option but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.

“Someone in my situation at that time, not being able to buy that kind of age car with cash, you would use finance,” he said.

Following the judges decision in his – and two other car buyers’ – favour, banks have set aside millions of pounds for potential compensation. Lloyds Banking Group, for example, has put aside £1.2bn.

It’s thought the total cost of compensation could reach £25bn or more, according to analysts.

The FCA said that the decision could lead to dealers and motor finance providers receiving a deluge of new complaints, and it is urging people to make a claim if they feel they were the victims of mis-selling.

Some could come from people previously told they had no claim for compensation because they did not have a discretionary commission arrangement.

The regulator has extended the time providers have to consider complaints until December 2025, aligning the deadline for firms to deal with discretionary and non-discretionary arrangement complaints.

The time period covers claims regarding leasing deals, as well as Personal Contract Purchase (PCP) agreements.

The FCA also wants the Supreme Court to make a quick decision when it reconsiders the Court of Appeal’s ruling.

The Finance and Leasing Association, the trade body for motor finance providers, welcomed the extension.

However, others have questioned whether it creates a further compensation delay for those who were mis-sold these agreements.

In February, the Supreme Court rejected an unusual intervention from the government, which was worried huge amounts of redress payments could upset the car market and make it less competitive.