Car finance companies must hold back funds to cover impact of regulator’s investigation

The UK’s financial regulator has warned companies to hold back cash to cover the costs of its regulatory probe into car finance loans

Car finance firms have today been warned that they must account for the potential costs of the Financial Conduct Authority’s investigation into discretionary commission arrangements. 

The Financial Conduct Authority (FCA) also revealed that many firms ‘are struggling to promptly provide the data we need’ for the probe.

Earlier this year, the regulator launched a review into whether people could be owed compensation for being charged too much for car loans, following a high number of complaints.

The regulator said in January it had heard from more than 10,000 people who fear they were charged too much for their car finance loans and suggested it will look to secure compensation settlements if it finds widespread misconduct.

The regulator has written to firms involved in the investigation to call on them to adequately engage with the process and ensure they have funds needed.

Alex Neill, co-founder Consumer Voice, said: 

‘It is only right that all car finance providers that used discretionary commission should be setting aside money. Customers who have been overcharged will expect to get back what they’re owed.’

‘If you had a car loan before 2021 you should get in touch with your finance provider to check if this commission was applied. There are free templates you can complete, like ours, in a matter of minutes.’

Have you paid too much for car finance?

Drivers could be owed up to £1,100 for car finance deals taken out before 2021. It’s free and straightforward to check with your car finance company whether you had a discretionary commission agreement.

Our car finance guide gives you step-by-step advice for claiming car finance compensation if you suspect the interest you agreed on a loan was too high.

‘People looking to find out if they had discretionary commission added to their loan can use free templates to write to their finance provider,’ said Neill. 

‘You may not get a final response until the financial regulator has finished its investigation but your provider does need to start investigating your complaint now.’

Alex shares her top tips if you think you might be eligible to claim

Regulator’s probe into ‘discretionary commission’

The Financial Conduct Authority (FCA) opened a review in January into whether people could be owed compensation for being charged too much for car loans, following a high number of complaints.

The Financial Conduct Authority (FCA) banned the use of ‘discretionary commission’ in 2021, estimating it could be costing consumers £165 million a year. 

Before the ban, car brokers (the person who arranges your loan) were allowed to set or adjust the interest rates they offered customers for car finance.

Car dealers were paid higher commission – known as a ‘discretionary commission arrangement’ – if they arranged a higher interest rate with their customers. This meant that car brokers had an incentive to increase how much people were charged for their car loan.

The FCA said if it finds that consumers have lost out because of widespread misconduct, it will make sure they get compensation in ‘an orderly and efficient way.’

Issues securing information from companies

The regulator said it is progressing with the review but highlighted some issues in securing necessary information from companies.

‘Firms involved in our review have engaged with us constructively,’ the FCA said. 

‘However, many firms are struggling to promptly provide the data we need.’

‘Reasons for this include data being stored on multiple systems and/or being spread between lenders and brokers. In some older cases, firms have not retained all relevant records.’

The regulator has today told companies to ‘undertake an assessment of whether your firm’s financial resources are adequate.’ 

Scale of potential compensation payouts

The scale of potential settlements over the issue remains unknown, but comparisons are being drawn with the multi-billion-pound PPI mis-selling scandal. It is suggested that the regulator may decide to bring in a similar scheme of redress to deal with car finance.

UK banks have already confirmed they have set aside a significant funding to potentially address the issue. Lloyds Banking Group announced in February that it has set aside £450 million for car finance costs and compensation payouts.

The FCA also confirmed that Barclays bank has launched a judicial review appeal against the Financial Ombudsman Service judgment which sparked the FCA review process.

It said: ‘We recognise this work has generated some uncertainty. We want to provide certainty to consumers and firms as soon as possible. However, that relies on receiving comprehensive data promptly from a range of firms, and potentially, the speed and outcome of any litigation.’

The FCA said it will set out its next steps in the review process by September 24 at the latest.