Car finance victims told to complain to get compensation

Motorists who feel they were mis-sold car finance should complain to their lender, the City watchdog has told MPs.

Facing the Commons Treasury Committee, bosses at the Financial Conduct Authority (FCA) were told the situation was "one unholy mess" that would take a long time to resolve.

The car finance saga relates to hidden, unfair commission that lenders and dealers took from customers before 2021. These arrangements were banned in 2021.

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Dame Meg Hillier, a Labour MP, accused dealers and lenders of not being transparent with their customers, and asked the FCA what advice it had for anyone affected by it.

Nikhil Rathi, chief executive of the financial regulator, said: "If you are not satisfied with the terms of your finance agreement, you should contact your lender and put in a complaint to your lender if you are concerned."

Hundreds of thousands of complaints are likely to have already been made. The scandal could end up with the biggest compensation scheme regarding financial products since the payment protection insurance (PPI) saga.

Major UK bank Lloyds has already set aside £450 million for potential redress. It is a significant provider of car finance through its Black Horse brand.

Who is affected?

If you bought a car, van or motorbike on PCP (personal contract purchase) or hire purchase (not leasing) before 28 January 2021, you could be due compensation.

The FCA was originally investigating motor finance complaints where a discretionary commission arrangement (DCA) was involved.

But in October, a landmark Court of Appeal ruling widened the saga to other types of "hidden" commission payments and raised the possibility of millions of motorists receiving pay-outs.

A Court of Appeal judgement involving lenders Close Brothers and FirstRand Bank ruled in favour of consumers, deciding it was unlawful for car dealers to earn a commission without informing the customer and securing their consent. The judgement related to fixed commissions as well as DCAs. Both lenders intend to appeal.

“Firms who provide motor finance are likely to receive a high volume of complaints in response to the judgement,” the FCA said. As a result, the FCA has proposed extending the amount of time firms have to handle complaints to allow the process to take place “efficiently and effectively”.

The regulator is looking at extending the deadline to either 31 May 2025 or 4 December 2025. The former deadline reflects the amount of time it could take to hear whether the Supreme Court has allowed an appeal. The latter would align with the current rules on DCAs.

“The Court of Appeal’s ruling means many customers who bought a car using finance through a dealer could be owed compensation,” says Rathi. “We want to make sure that consumers who are owed money get it in an orderly way, and that the motor finance market continues to provide competitive deals for the millions of people that rely on it.”

Rathi says firms will need to use the additional time to make sure they have the resources needed to investigate and respond to complaints by the end of the extension period. He added that firms should also consider whether they need to make financial provision.

What is the FCA motor finance market review?

The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.

But the City watchdog was concerned at the level of complaints that firms are rejecting about the issue, which are later being upheld when challenged through other channels.

It said firms are rejecting most complaints because they consider that they have not acted unfairly, nor caused their customers loss based on the applicable legal and regulatory requirements.

However, the Financial Ombudsman Service (FOS) has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints. Claims have also been brought in the county courts, some of which have been upheld.

The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.

It launched the motor finance market review in January 2024.

The FCA has used its powers to pause all complaints about DCAs until 4 December 2025 as it reviews the sector and these sales more widely.

Could customers be awarded compensation?

The FCA’s review is currently ongoing, and any potential redress will depend on the outcome of its investigation.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance,” the FCA said earlier this year.

A clearer idea on whether a "structured redress system" that would either require customers to complain, or ensure firms go back through cases and pay compensation, would come next year, the Commons Treasury Committee was told this week.