The regulator is using its powers to decide whether firms owe compensation to millions of customers mis-sold car finance loans
The Financial Conduct Authority (FCA) is reviewing whether motor finance customers could be owed compensation for being charged too much for car loans, following a high number of complaints which are being rejected by firms.
Problems with car finance date back to 2021 when car dealers were paid higher commission – known as ‘discretionary commission’ – if they arranged a higher interest rate with their customers.
The regulator banned the use of ‘discretionary commission’ in 2021, estimating it could be costing consumers £165 million a year. This led to high levels of compensation claims against motor finance firms from customers who are worried about how much they were charged before the ban.
The FCA has said that motor finance firms are ‘rejecting most complaints because they consider that they have not acted unfairly nor caused their customers loss.’ However, the financial ombudsman has reported an increase in complaints from people worried about whether they can pay their car finance deals. It has found in favour of complainants in some of these claims.
The regulator is now stepping in to use its powers under the Financial Services and Markets Act 2000 to review motor finance commission arrangements and sales prior to the ban. It has said it will ensure consumers are paid what they’re owed if it finds ‘widespread misconduct’.
Alex Neill, co-founder of Consumer Voice, said:
‘This intervention by the regulator is urgent and necessary. Millions of consumers have lost billions of pounds because they were charged inflated prices as a result of secret commission deals. Complaints have been queuing up at the ombudsman and consumers need clarity to get back what they’re owed.’
The scope of any potential scheme for redress could be on a similar scale to PPI but this marks a significant departure from the handling of that scandal with the regulator stepping at an earlier stage.
Ombudsman finds evidence of unfair commission arrangements
The Financial Ombudsman Service (FOS) has seen an increase in car financing commission claims since the 2021 ban. Abby Thomas, chief executive and chief ombudsman 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. Our decisions could signal the way forward for many more similar complaints that have not been resolved between firms and consumers.’
The FCA said: ‘Claims have also been brought in the County Courts, some of which have been upheld. So, there is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.’
Consumers to be given more time to escalate complaints
Consumers are also being given up to 15 months to escalate complaints not decided in their favour to the Financial Ombudsman, rather than the usual 6 months.
The extension applies to complaints where the firm sent a final response between 12 July 2023 and 10 January 2024, or where the firm sends a final response during the period beginning 11 January 2024 and ending with 20 November 2024.
Thomas said: ‘If people are concerned about their car loans and are unhappy with how firms have responded, they can come directly to our free, independent service and we will investigate their complaint.’
The FCA has also published guidance for consumers who want to find out more about how this affects them.
What this means for consumers who haven’t yet complained
Consumers who think they might be owed compensation but haven’t yet complained are being urged to complain within the existing time limit. This is generally within 6 years of the problem happening.
If you missed this deadline, you can complain within 3 years of becoming aware you had cause to complain. You just need to be aware that car finance firms are being given longer than usual to respond to complaints.
Firms told to pause to 8-week deadline for dealing with customer complaints
The regulator is pausing the 8-week deadline for dealing with complaints about car finance agreements to, it says, ‘prevent disorderly, inconsistent and inefficient outcomes for consumers’.
This pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024. It will be in place for around 9 months while the regulator investigates the car finance market.
Sheldon Mills, executive director of consumers and competition at the FCA, said:
“If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way.”
The FCA has said that any actions ‘will be informed by our statutory objectives to protect consumers, ensure market integrity and promote competition in the interests of consumers.’
Class action against UK car financing firms
Consumer advocate Doug Taylor last year launched a £1 billion collective action lawsuit representing around one million UK consumers who he said had unwittingly overpaid for car finance over a six year period.
He filed legal claims accusing Lloyds Banking Group, MotoNovo and Santander of anti-competitively inflating interest rates for finance agreements on used cars. Taylor, who is waiting for the competition court to certify his claim, said:
‘We welcome the FCA’s recognition of the issues around car loans and the over-charging to consumers that may have resulted. We intend to engage actively with the FCA and await the outcome of its diagnostic process with interest. We filed our opt-out collective action in July 2023, seeking compensation through the Courts for consumers who bought second hand cars between October 2015 and January 2021. These affected consumers are automatically included in our action and therefore need take no action until the FCA is clearer as to what, if any, compensation will be put in place.’
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