Martyn James: Car finance compensation is still on the cards

Ultimately, the court decided that hidden commission on car finance loans was not unlawful, saving the industry anywhere up to £40 billion in compensation. However, the court did uphold one aspect of the claim where they felt an individual had been treated unfairly. That leaves the door open for compensation.

Got all of that? Don’t worry if you haven’t! Car finance complaints are so ludicrously complicated that just trying to explain what’s happened is a nightmare. However, that’s my job – so here’s my guide to car finance, commission and compensation.

Why is car finance in the news?

Car finance – lending money to help you buy a car in part or in full – is big business. In 2023 alone, £52bn was lent to people to fund purchases of both old and new vehicles.

The majority of finance agreements are ‘personal contract purchase’ deals (PCP). These contracts are fiendishly hard to understand, which means people were often bamboozled by car dealerships. Unbeknownst to buyers is the fact that the loan/credit providers paid the car dealerships commission for every loan sold. There were lots of different types of commission and incentives – which resulted in your final bill being much higher.

The Supreme Court found that in one case the claimant had been charged a whopping 55 per cent commission of the total loan, including interest and fees. The court agreed that this was unfair. They also found that the contract wasn’t clear about the commission too.

Am I entitled to compensation?

Back in 2021, the Financial Conduct Authority (FCA), which regulates the financial services industry banned a type of ‘discretionary commission’.

Discretionary commission works by allowing the dealer to increase the amount of interest you paid on your loan and boost their commission. The FCA estimated around 924,000 customers were paying £500 million in additional interest every year. Around four in ten people who took out car finance loans had these types of contracts.

Because the FCA had already found that this was unfair, it was considering introducing a redress (compensation) scheme for those affected. However, this went on to the back burner until the Supreme Court ruling.

Now that’s over, the FCA has announced that it will consult on a redress scheme and will publish this in October. It’s likely that ‘excessive’ commission, like the Supreme Court case, will be covered by the scheme, as well as people who had discretionary commission agreements.

There are lots of things that still need to be confirmed, including timescales, how far back claims can go, decisions on when commission becomes excessive and more. But we do know that a scheme will be in place soon.

It’s likely that you’ll be able to claim for car finance deals all the way back to the date that motor finance became regulated – April 6, 2007. And how much will it cost? The FCA estimates that it will be in the region of £9bn to £18bn in total.

How do I claim compensation?

At present, you don’t need to do anything – apart from reading the news, of course! However, you can find out information, get updates and download template letters on free websites like Consumer Voice and MoneySavingExpert.

I believe that businesses will be expected to contact their customers who are covered by the redress scheme. But that’s not going to be easy, given that people may have moved or changed their contact details. So now is the time to start digging around in the back of your drawers to find your old agreements. If you are struggling, your credit reference report may list old deals and bank statements could help you figure out who the lenders were.

One warning though. Under no circumstances should you use a claims management company. These firms charge you a major percentage of your compensation for doing very little. Don’t throw your money away on them.

Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist. Visit martynjamesexpert.co.uk.