In what has been called “PPI on wheels”, millions of people who bought a car on finance could pocket payouts of £700 on average each – with around £8bn expected to be paid out
Millions of car buyers are set to be in line for average payouts of £700 under the biggest compensation scheme since the mis-selling of payment protection insurance.
City watchdog the Financial Conduct Authority has announced proposals what it thinks will be a more than £8billion redress scheme for people who were mis-sold car finance. According to the FCA, money could start to be paid on an expected 14 million unfair motor finance agreements as soon as next year.
Money saving expert Martin Lewis has already called the compensation scheme “the biggest one we’ve seen since PPI”. But just what is it, why is it being launched, and could you be in line for money?
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, or more specifically Hire Purchase (HP) or Personal Contract Purchase (PCP) finance.
The broker who arranged the 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. Consumer champion Martin Lewis, of Moneysavingexpert, said: “What really made me raise my eyebrows is that the way it’s going to be paid out is by far the simplest form of redress scheme we’ve seen, never mind for one of this scale.”
Am I eligible? The scheme would cover many motor finance agreements taken out any time between April 6 2007 and November 1 2024, where commission was paid by the lender to the broker. Of the 32 million car finance agreements in that time, the FCA believes more than 14 million were likely mis-sold. It applies to both new cars and second hand. And 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. Its consultation closes next month. 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 to contact those who have already complained they were mis-sold car finance – around four million. If they don’t 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.
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 who are eligible for compensation don’t 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.
I bought a car on finance, but how do I know if I was missold it?
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.
1. The first is the one that has been talked about a lot and will apply to the most people.
It involves a “discretionary commission arrangement”, which allowed the broker – or ca dealer – to alter the interest rate the customer would pay so that they could end up pocketing higher commission, even though that meant the buyer shelled out more in interest payments.
2. This involves unfairly high commission. The FCA believes it applies to 2.9 million cases. It is where the amount of commission was both more than 35% of the total cost of the credit and over 10% of the amount that the buyer borrowed.
3. The last is where the dealer was contractually tied, or where they didn’t shop around for the best deal for the buyer.
How is the payout calculated?
The FCA thinks consumers should be compensated the average of what it estimates they have overpaid, or lost, and the commission paid, plus interest. It will look at the difference in the interest rate charged on loans with discretionary commission arrangements compared to those with flat fee arrangements. For example, if someone was charged an interest rate of 10% on the finance they took out where undisclosed commission was paid, but the likely rate would have been 8.3% otherwise, then the loss was the difference.
Martin Lewis explains: “It will be roughly 17% of the interest. So for every £1,000 of interest you were charged, you’ll get back £170 – and that’s being done on an average. It’s not a case by case basis, so some people maybe will be worse off because of this, some people will be slightly better off because of this.”