The Financial Conduct Authority has fired the starting gun on one of the biggest ever financial sector compensation schemes – leading to it being dubbed “PPI on wheels”
Millions of car buyers could be in line for their share of a payout of more than £8 billion under a compensation scheme proposed by the City watchdog.
According to the Financial Conduct Authority, money could start to be paid on an expected 14 million unfair motor finance agreements as soon as next year, estimating that car buyers could receive around £700 on average per agreement. The information came as the FCA released details of the proposed industry-wide compesation scheme, a move following evidence at some motor dealers did not tell buyers they were earning commission from lenders on some car finance deals sold.
The FCA stepped in after a Supreme Court ruling provided clarification on a separate issue, which could have seen even more people entitled to compensation. But what does it all mean, and how will it work? We’ve broken down the big questions below.
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Why are finance firms on the hook for payouts at all?
It goes back to the information car buyers were given – or more importantly not given – when they bought a vehicle on finance.
The broker who arranged the loan or finance agreement – often the car dealer – often earned a commission from the lender for doing so. But the controversy centres on whether that payment was revealed to buyers a the time, whether it was excessive, and if it affected the cost of the loan in terms of the interest rate they were charged.
The Financial Conduct Authority found motor finance companies broke the law and regulations in force at the time by failing to disclose this important information. “This led to unfairness, with consumers denied the chance to negotiate or find a better deal and, in some instances, paying more for their loan,” it said.
What has the FCA announced?
An industry wide compensation scheme. They are proposals at this stage and could yet change based on feedback. But the plan is for the scheme to be up and running early next year.
Am I eligible?
The scheme would cover motor finance agreements taken out between April 6 2007 and November 1 2024, where commission was paid by the lender to the broker. It applies to both new cars and second hand. The FCA estimates that 44% of all agreements made since 2007 will be eligible for payouts.
Money could start to be paid on an expected 14 million unfair motor finance agreements next year. It could be that people took out more than one loan over the whole of that time, meaning they could get multiple payouts. Buyers who took out around four million loan agreements between them have already made complaints, meaning another 10 million have yet to engaged in the process so far.
How much could I get?
The FCA is estimating average payments of around £700 per agreement. That average includes some lower amounts but in the case of a much smaller number of people – about 13,500 – it could be much higher because, for instance, the commission paid was seen as particularly excessive.
The regulator has estimated the total compensation at £8.2billion. It is less than the £9billion to £18billion it had originally estimated but would still be one of the financial sector’s biggest compensation schemes. The £8.2billion figure is based on 85% of eligible claimants getting money. If all 100% did then the amount could be £9.7billion. Experts think firms will have to shoulder a further £2.8 billion of costs, taking total industry costs to around £11 billion.
What should I do now?
Sit tight while the FCA finalises the details of the scheme.
Crucially, what is being proposed would be free for consumers. It follows concerns over the role of claims management companies given some can take a big chunk of any payout. It stressed that people can submit their own complaint using a template letter on the FCA’s website. And it added: “Those who choose to use a claims manager or law firm could lose a significant amount of any compensation owed. “
How will the scheme work?
Once the proposed scheme goes live, lenders will be expected contact those who have already complained they were missold car finance – around four million. It says that if they do not hear back after one month, lenders will be expected to review the case. Those who have not complained should be contacted by their lender within six months of the scheme starting. They will be asked if they want to opt-in to the scheme to have their case reviewed.
If they have already signed-up with a claims management compant, they can opt out and use the free scheme. However, they may be hit with an exit fee. The FCA is keen to stress that any such fees must not be excessive and have put the firms on warning.
It could be that those eligible for compensation do not receive a letter, for example, because lenders no longer have their details and can’t trace them. In that case, they will have a year from the scheme starting to make a claim. They will be able to do so by making a claim to their lender directly. If they don’t know who their lender was, the FCA says there will be information on how to check on its website. The watchdog is also planning an advertising campaign to raise awareness of the scheme. Compensation will only be due if buyers were not told about at least one of three arrangements that were in place between the lender and the broker or dealer.
They are a “discretionary commission arrangement”, which allowed the broker to alter the interest rate the customer would pay in order to pocket higher commission, a chunky commission that amounted to 35% of the total cost of the credit and 10% of the loan, or contractual ties that gave a lender exclusivity or a right of first refusal.