Car Finance Claims Could Lead to Payouts

The Great Car Finance Scandal: Are You Owed Thousands?

A vast number of UK drivers could qualify for significant compensation due to the improper sale of car finance deals. A wide-ranging inquiry by financial authorities into the past conduct of lenders and car dealerships is currently active. This investigation, combined with a pivotal judgment from the Supreme Court anticipated for July, has the potential to launch an industry-wide redress program. Such a program could see vast sums of money handed back to consumers who were unfairly made to pay too much. The entire controversy has sparked a heated national conversation, casting a significant shadow over Britain's largest banks and finance providers.

The Core of the Controversy

A great number of new automobiles, and a substantial portion of used ones, are acquired in the UK using finance packages, with around two million such transactions happening each year. These packages usually require a customer to provide an upfront payment, which is then followed by monthly payments that carry an interest charge. The scandal revolves around 'discretionary commission arrangements' (DCAs). The city's financial watchdog, known as the Financial Conduct Authority (FCA), prohibited this practice in January 2021. These arrangements empowered car sellers, who were also credit brokers, to determine the borrowing cost on a person's loan. Critically, a steeper borrowing cost meant a bigger commission for the seller from the finance company. The FCA determined this system created a direct incentive for brokers to set unnecessarily high rates, leading to customers overpaying.

A System Under Scrutiny

Since the start of 2024, the FCA has undertaken a significant review to determine if compensation should be provided for agreements made before the 2021 prohibition. This inquiry has suspended the standard eight-week timeframe for companies to address grievances, with about 80,000 cases already filed with the Financial Ombudsman Service. The immense number of possible claims, encouraged by consumer advocates like Martin Lewis, has resulted in more than 2.5 million complaints being submitted via free web-based tools, demonstrating the extent of public anxiety. The FCA is now giving serious thought to a formal repayment program to make sure any restitution is managed in a systematic and effective way.

Image Credit - Freepik

Who Is Entitled to a Payout?

It is possible that countless drivers who acquired a vehicle with financing prior to 28 January 2021 might qualify for recompense. Qualification depends on whether their contract contained a discretionary commission setup and their unawareness of it. The FCA has indicated a preference for a coordinated, central repayment program. For individuals, this would be more straightforward than pursuing separate legal actions. A program of this nature would require finance businesses to proactively check their files to find customers who suffered a financial detriment.

The Court of Appeal's Bombshell Ruling

The circumstances were dramatically altered by a critical ruling from the Court of Appeal in October 2024. This judgment widened the issue's scope from just DCAs to cover any kind of unrevealed commission. The justices were in complete agreement that it was unlawful for a finance provider to give any commission to the seller unless the buyer had given knowledgeable approval. In short, purchasers should have been clearly informed of the precise commission amount, rather than having a non-specific mention concealed within the contractual details. This unexpected ruling caused major tremors throughout the motor finance sector.

The Supreme Court Showdown

The Court of Appeal's expansive ruling was quickly challenged by lenders, among them Close Brothers and FirstRand Bank (which owns MotoNovo). The Supreme Court reviewed the challenge over three days in April 2025, with a final verdict expected for delivery in July. Both the FCA and the National Franchised Dealers Association presented submissions during the hearing. The verdict in this case is critical. It will establish the industry's ultimate level of liability and define the structure of any program for redress.

Image Credit - Freepik

A Tale of Two Wrongs

The legal dispute focuses on two separate forms of potential mis-selling. The first involves Discretionary Commission Arrangements (DCAs), which is the main subject of the FCA's inquiry. These are relevant to an estimated 40% of car finance contracts from before the ban. The second, much wider, point of contention arises from the Court of Appeal’s judgment on general commission transparency. This "Commission Disclosure" line of reasoning suggests that nearly all (up to 99%) of vehicle finance contracts with any commission were illegal if the purchaser was not made fully aware of the amount. This broader view was a surprise even to the regulator.

Voices of the Affected

The human impact of these business practices is considerable. The appeal to the Supreme Court features the situation of Marcus Johnson, of Cwmbran, who completed his acquisition of a Suzuki Swift during 2017. He was completely oblivious that 25% of his loan payments were being directed back to the vehicle seller as commission. His experience of merely putting his signature on some papers and leaving with the car, before later finding out about the extra fees, he describes as "heartbreaking." It mirrors the situation for many consumers who felt they were compelled to arrange financing to get hold of an essential vehicle.

Preparing for the Financial Fallout

The possible financial consequences for the banking and finance industries are immense. Lending institutions have started allocating enormous sums to manage potential repayment obligations. Lloyds Banking Group, which operates Black Horse, the UK's biggest provider of motor finance, has earmarked £1.25 billion for possible payments. Projections from analysts regarding the total industry-wide cost differ significantly, with some figures reaching as high as £25 billion to £44 billion, drawing parallels with the PPI mis-selling affair. This ambiguity has made investors nervous and sparked fears about the future soundness of the vehicle financing sector.

Government and Regulatory Concerns

The magnitude of the possible repayments has drawn the government's attention. In a rare action, the Treasury sought to get involved in the Supreme Court proceedings. It expressed fears that a huge redress bill could upset the automotive sector, diminish competition, and restrict the capacity of banks to lend. The court ultimately denied this request for involvement. The FCA has also recognised the fine line that must be walked, declaring that any repayment framework needs to be equitable for purchasers while preventing the sector's failure.

What Happens Next for Consumers?

The FCA has informed consumers that they won't need to hire claims management firms to take part in any future repayment program. The regulator plans for any program to be easy for people to handle on their own. For now, the time limit for companies to handle all commission-related grievances is suspended until December 2025, pending the legal clarification from the Supreme Court. The FCA will reveal its conclusive strategy for a redress program, or a different approach, inside a six-week window following the Supreme Court's verdict in July.

Image Credit - Freepik

Calculating Potential Compensation

The specific sum that individuals might get is still uncertain and will be based on the details of each case. However, the guiding idea is that a motorist would probably receive back the variance between the higher borrowing cost they were charged and the proper one they should have had. In addition to that, an additional 8% interest on that overpayment would supplement the loss, a factor that might substantially boost the final sum. Consumer advocates have estimated that the average payment could be approximately £1,100 for each affected contract.

Navigating the Claims Process

While the FCA's official program is not yet active, consumers are still able to take steps. They possess the right to complain at no cost directly to their lender or the broker. If they are not satisfied with the final reply, they can then bring the matter before the Financial Ombudsman Service. The standard six-month period for taking a complaint to the Ombudsman has been increased to 15 months because of the current inquiry. It is vital for consumers to locate all their relevant documentation, including their finance contract, to back up any claim.

A Wider Impact on Lending

The effects of this affair go beyond just car finance. The Supreme Court's ruling on the definition of "informed consent" and if undisclosed commissions constitute a form of bribery could establish a major precedent. This could affect other types of consumer lending where go-betweens receive a commission. The case examines the core obligations of brokers and if they have a fiduciary duty to serve the best interests of their clients. This is a question with extensive ramifications for the whole financial services sector.

The Legal Battleground Explained

The legal points put forward to the Supreme Court were intricate. Lenders maintained that car dealers do not have a fiduciary responsibility to customers because they are acting in their own business interest to sell cars and finance. They argued that if the interest rates were stated plainly, consumers were able to make an informed decision. On the other hand, lawyers for the consumers claimed that the payment of hidden commissions introduces a conflict of interest which fundamentally corrupts the agreement, constituting a form of bribery and a violation of trust.

The Road to Resolution

With the Supreme Court's verdict on the horizon, the way forward in settling this affair is becoming more defined. A ruling in July will be the signal for the FCA to complete its arrangements. Should the court find in favour of consumers, the regulator will probably move ahead with a consultation on a widespread redress program. This program would be targeted to become operational in 2026. It would offer a methodical and uniform method for repaying millions of drivers. The last part of this long story will be written over the next few months, holding serious consequences for both consumers and the finance industry.