Banks could be forced to proactively tell customers they have been mis-sold car finance, as the financial watchdog’s plans for a compensation scheme affecting potentially millions of Britons moved “one step closer”.
The Financial Conduct Authority (FCA) said on Tuesday it would announce its decision on such a scheme – which could result in redress totalling billions of pounds – within six weeks of a decision following a landmark supreme court hearing early next month.
It is the latest development in the ballooning scandal surrounding the alleged large-scale mis-selling of car loans.
If the scheme floated by the FCA goes ahead, lenders are likely to have to proactively contact all borrowers who meet the mis-selling criteria and offer compensation – freeing up individuals from the need to submit a complaint and dealing a blow to claims management firms. Payouts could typically average just over £1,100 a person, according to one estimate.
The website MoneySavingExpert.com said that payouts for mis-sold car finance were “one step closer” after the FCA announcement. Martin Lewis, the consumer champion and the site’s founder, said a redress scheme of the type being considered by the regulator would require lenders to proactively contact all borrowers who met the mis-selling criteria and offer them a payout.
“Therefore, people won’t need to complain – they will be paid out an amount dictated by the FCA to firms based on their situation. This likely stretches the net of who will be paid far wider (and means there’s no need to use claims firms),” he added.
The car loans scandal, which has been rumbling on for more than a year, is projected to cost lenders, including Santander UK, Close Brothers, Barclays and Lloyds, a collective £44bn, according to some analysts.
It kicked off in January 2024 when the FCA launched an investigation into discretionary commission arrangements (DCAs) on car loans issued between 2007 and 2021.
The practice meant car dealerships and brokers had the power to set interest rates on car loans, and earn higher commission along the way.
However, a court of appeal ruling last October vastly expanded the scope of the scandal and sent compensation estimates soaring. The ruling determined that paying a “secret” commission to car dealers who had arranged the loans without disclosing the sum and terms of that commission to borrowers was unlawful.
Two lenders, Close Brothers and FirstRand, hope to overturn the ruling at a supreme court hearing, due to be heard from 1 to 3 April.
The FCA said it had been granted permission to intervene in the case and had filed its submission – containing confidential information – with the court.
It added that if, taking into account the supreme court decision, it concluded that motor finance customers had lost out due to “widespread failings” by lenders, “it’s likely we will consult on an industry-wide redress scheme”.
Under such a scheme, lenders would have to follow rules to work out whether customers had lost out and, where they had, offer “appropriate compensation”.
The FCA said this would be simpler for consumers than requiring them to submit a complaint themselves. “We would expect fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive,” it added.
Lewis suggested that a typical payout for a DCA claim could be £1,140. The regulator has previously indicated that for, a typical £10,000, four-year car finance deal where a DCA was used, a customer might have paid £1,100 too much in interest. However, there could be a requirement for companies to pay interest on top of that.
