Millions of UK consumers who bought a car, van, or motorbike on finance before 2021 could be in line for compensation averaging £950, as the financial regulator prepares to announce the findings of its major investigation into car finance mis-selling. The Financial Conduct Authority (FCA) is expected to deliver its verdict on so-called “discretionary commission arrangements” within months, potentially triggering one of the largest consumer redress schemes since the PPI scandal.
The investigation centres on whether lenders unfairly incentivised brokers and car dealers to charge customers higher interest rates, a practice that was banned in January 2021. The FCA paused an eight-week deadline for firms to respond to complaints last year to assess the full scale of the issue. A decision on whether a mass compensation scheme is required is now anticipated.
FCA Car Finance Investigation
| Insight | Details |
| What is being investigated? | Discretionary commission arrangements (KW3), where brokers could inflate interest rates to increase their commission. Financial Conduct Authority (FCA) |
| Who may be affected? | Customers who purchased a vehicle using finance before 28 January 2021. |
| Potential Compensation? | Analysts estimate an average payout of around £950 per affected consumer. |
| Next Steps? | The FCA is expected to report its findings and outline any redress actions soon. |
Understanding the FCA Investigation into Car Finance Mis-selling
The Financial Conduct Authority (FCA) launched its review after a high number of complaints from consumers to the Financial Ombudsman Service. These complaints alleged that lenders and dealers operated under a system that created a conflict of interest.
Specifically, the regulator is examining discretionary commission arrangements (KW3). Under these models, lenders gave car dealers and other credit brokers the power to set the interest rate for a customer’s loan. The higher the interest rate, the more commission the broker received. According to the FCA, this created an incentive for brokers to charge people more for their car finance, meaning customers were often unaware they could have secured a cheaper deal.
This practice was banned by the regulator on 28 January 2021. However, the investigation is focused on agreements made before this date, potentially affecting a significant portion of the UK’s 27 million active car finance agreements.
Who is Eligible for a Payout?
Eligibility for potential compensation hinges on a few key factors:
- Timing: You must have bought a motor vehicle using a finance agreement before 28 January 2021. This includes cars, vans, campervans, and motorbikes.
- Finance Type: The most common agreements involved are Personal Contract Purchase (PCP car finance) (KW4) and Hire Purchase deals.
- Commission Model: The finance agreement must have included a discretionary commission arrangement.
The FCA has stated it is working to determine the extent of the harm caused. In a statement earlier this year, the regulator acknowledged the investigation was complex but necessary “to ensure that, if we find there has been widespread misconduct, we have an orderly way of making sure people get the money they’re due.”
The £950 Figure and Next Steps for Consumers
The estimated £950 payout figure gained prominence following analysis by financial services firm Jefferies and has been widely cited by consumer champions like Martin Lewis, founder of MoneySavingExpert. It is important to note that this is an average estimate, and any final compensation claims (KW4) could be higher or lower depending on the size of the loan and the interest rate overcharge.
While the FCA paused the complaint process to conduct its review, it has advised consumers they can still submit a complaint to their lender to ensure it is logged. Consumers do not need to use a claims management company to do this.
If a consumer is unhappy with the lender’s final response, they can then escalate the complaint to the Financial Ombudsman Service. The outcome of the FCA’s review will provide a clear framework for how all complaints should be handled.
“The sheer volume of potential claims has prompted the regulator to step in to create a more manageable process,” said an automotive industry analyst. “The industry is bracing for a significant financial impact, but for millions of consumers, this could mean receiving fair compensation for inflated costs they were never told about.”
The FCA is expected to publish its final report and proposed actions before the end of the year. This will clarify whether a formal redress scheme will be implemented and will outline the process for consumers to claim any money they are owed.
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FAQs
1. What is a discretionary commission arrangement?
A discretionary commission arrangement was a system where a car dealer or broker could adjust the interest rate offered to a customer on a finance deal. The higher the interest rate they set, the more commission they earned from the lender.
2. How do I know if my car finance agreement was affected?
If you bought a vehicle on finance (like PCP or Hire Purchase) before 28 January 2021, your agreement may have included this type of commission. You can contact the lender who provided your car finance to ask if your agreement had a discretionary commission arrangement.
3. Should I use a claims management company to make a complaint?
It is not necessary. The FCA and consumer groups like MoneySavingExpert have confirmed that consumers can file a complaint directly with their lender for free. If the complaint is rejected, it can then be taken to the independent Financial Ombudsman Service at no cost. Claims management companies typically charge a significant percentage of any compensation awarded.
