Fear of delays due to mis-sold payouts

Regulators want to give more time to car dealers who could face a flood of claims over mis-sold financing deals.

A decision by judges at the Court of Appeal has sparked an ongoing saga over hidden commission payments, with buyers potentially lining up for payouts totaling billions of pounds.

Now the Financial Conduct Authority (FCA) is discussing giving dealers extra time to deal with complaints.

However, lawyers say this could further delay compensation payable to car buyers who may not have given informed consent to the commission payments.

The vast majority of new cars, and many used cars, are purchased with financing agreements.

About two million are sold this way each year, with customers paying an initial deposit and then a monthly fee with interest for the vehicle.

In a complicated and protracted series of developments, many of these agreements have come under scrutiny.

In 2021, the FCA banned deals where the dealer received a commission from the lender based on the interest charged to the customer. It said this was an incentive for a buyer to charge a higher than necessary interest rate.

Since January, consideration has been given to whether compensation should be paid to people with these deals before 2021.

That has created the prospect of banks and other lenders having to make payouts totaling millions of pounds.

Last month, a Court of Appeal ruling widened the net of those who could receive compensation, potentially pushing lenders’ final bill up to billions of pounds.

While the initial investigations concerned discretionary commission schemes, which were banned in 2021, the Court of Appeal decision expanded the scope to include any self-financing commissions.

The three judges unanimously agreed that it would be illegal for the lender to pay commission to the dealer without the buyer’s informed consent.

In other words, customers should be told clearly how much commission would be paid and agree to it, without these details being hidden in the terms and conditions of the loan.

The hearing included the test case of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car in 2017 – a Suzuki Swift.

He was not told that the car dealer received a 25% commission on top of what he had to pay back.

“I signed a few papers and then drove away in the car,” he says told the BBC.

He said he had no choice but to use financing when he bought the car, describing it as “heartbreaking” to discover so much extra money had been taken.

“Someone in my situation at the time, who couldn’t buy such an old car with cash, would use financing,” he said.

Following the judge’s ruling in his favor – and that of two other car buyers – banks have set aside millions of pounds for possible compensation. Other lenders have temporarily suspended new deals.

Analysts say the cost of compensation could reach £16 billion.

The FCA said the decision could lead to dealers receiving a flood of new complaints.

Some may come from people who were previously told they were not entitled to compensation because they did not have a discretionary commission scheme.

The regulator is discussing extending the time car dealers have to respond to complaints.

The Supreme Court also wants to decide quickly whether it will reconsider the ruling of the Court of Appeal.

It wants an orderly compensation system, if it comes to that.

The Finance and Leasing Association, the trade body for car finance providers, described the FCA’s plan as a “sensible move”.

However, others have questioned whether this creates a further compensation delay for those who were mis-sold these deals.