Few would deny that finance plans have made it easier than ever to own the car of your dreams – or indeed, the car of your school-run and commuting requirements. However with all such opportunities, there is usually someone ready, willing and able to exploit the system to their own unethical and possibly even illegal advantage and it seems the rise of car finance may be no different, and could come at a cost to millions of motorists.
Which is why the Financial Conduct Authority (FCA) is investigating whether there was widespread mis-selling of car finance. The probe could unearth billions of pounds of overcharged interest, which could see consumers due an average of £1100 in compensation. The Financial Times reports that analysts estimate it could cost banks £16 billion in settlements.
At the heart of the FCA’s investigation is a practice called ‘discretionary commission arrangements’, or DCAs. These allowed brokers and salespeople at car dealers to lower or raise interest rates on individual finance packages. However, in return for the higher interest level, lenders would pay a higher commission – but the customer would not be made aware that they were paying more than the lender’s market rate at the time of the offer.
The FCA believes that had consumers been made aware that there was not a flat rate of interest, they would have haggled over the payable interest rate and secured a cheaper finance deal.
Is car finance mis-selling the next PPI?
In much the same way that PPI (Payment Protection Insurance) became a widely known acronym across the UK, following campaigning by the consumer group Which?, ‘DCA’ is likely to enter the national vocabulary.
The practice of undeclared commissions was banned in January 2021 but since then the FCA has gathered sufficient evidence of wrongdoing to launch a formal investigation.
The FCA’s probe was prompted after two consumers lodged complaints about hidden commissions. One, upheld by the Financial Ombudsman against Black Horse, related to a case whereby a car buyer paid a 10.5 per cent annual rate and another upheld against Clydesdale, then owned by Barclays, was linked to a deal through which the consumer paid an 8.9 per cent APR. The ombudsman concluded that the lending banks would have accepted lower rates and said there was a conflict between the interest of consumers and brokers.
Following its research, the FCA estimates that 40 per cent of car finance sold before the banning of DCAs in 2021 could have included an element of interest inflation. The finance products under the spotlight are hire purchase plans (HP) and personal contract purchase plans (PCP). The latter, in particular, has boomed in popularity, accounting for 78 per cent (more than 684,000) of new car purchases in 2022, according to the Finance & Leasing Association, and 41 per cent of the 1.5 million agreements issued on used cars. To give an idea of the scale, the time frame could stretch back to 2007, although the FCA is still to decide. The organisation has paused its investigation to give time for car dealers, vehicle makers and banks time to self-investigate before it issues its final verdict, likely on 25 September this year.
Act now on car-finance mis-selling
One of the most vocal voices behind the emerging mis-selling probe is Martin Lewis, the unending consumer rights champion. ‘To announce such a public wide-scale investigation, [the FCA] will already have substantial evidence,’ Lewis wrote on his Money Saving Expert website. ‘What it is doing now is building that at a firm-by-firm level using its heightened investigatory powers.
‘Even with the FCA’s pause in place, we think it’s worth logging a complaint now to help reduce the risk of being ruled out if a future time limit is imposed,’ he said.
There are currently two time limits consumer should adhere to. The first is within six years of the problem happening. However, those that missed this deadline can complain within three years of becoming aware they had cause to complain. But such is the volume of complaints that the FCA has suspended the eight-week window in which car dealers and lenders previously had to respond. They now have until 25 September.
If you aren’t satisfied with the response provided by the provider, the FCA says you can take a complaint to the Financial Ombudsman. It has also extended the window for consumers to take this up with the Ombudsman, from six months after receiving a final response from the provider, to 15 months until 20 November.
How to check old car finance plans
At least two of The Intercooler team have logged complaints about the finance packages they were sold with three cars they’ve owned in the past. (One car maker, Mercedes, has confirmed that a discretionary commission had been included; the rest are still to investigate.) The good news is it’s a reasonably quick process, assuming you can still lay your hands on copies of past HP or PCP agreements from the relevant period.
If you have paper copies of past finance agreements, it’s time to settle down with a cup of tea and a Bourbon and review the small print. If the terms and conditions of any past HP or PCP don’t declare any discretionary commission arrangements, be suspicious.
A practical tip is to look at the interest rate you were paying for the finance and compare it with the Bank of England’s historic interest rate. You can easily see all rates set via this Bank of England database. If there’s a glaring gap between the two, it could be cause for concern that is at least worth following up.
If you don’t have paper copies of old contracts, search your email inbox, as it is likely that copies would have been sent to you during the car purchase process.
To save yourself the bother of drafting a letter of complaint, the Money Saving Expert site has a free tool that will do much of the work for you, while ensuring you have provided all appropriate evidence.
Alternatively, there are claims management companies circling this issue with glee. But as consumer group Which? points out, by using their services you’ll give part of any payout to that firm should your claim prove successful. By handling the claim yourself, you’ll keep all due compensation.
For further information from the FCA, follow this link.
