Millions of Britons could be set for compensation as the City watchdog launches a probe into the motor finance industry.
The Financial Conduct Authority has followed up its 2021 ban on discretionary commission arrangements, which removed the incentive for brokers to increase the interest rate that motor customers pay, with the launch of a review into ‘the commission arrangements and sales’ of ‘several firms’.
Should the probe find ‘widespread misconduct and that consumers have lost out’, the FCA has vowed ‘to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way’.
The Financial Conduct Authority banned discretionary commission arrangements in 2021, opening the door to floods of complaints
Some experts have suggested the move could lead to billions of pounds paid out in financial address, describing it as a potential ‘next PPI scandal’.
The 2021 decision banned the use of discretionary commission arrangements between lenders and the intermediaries – dealerships – that sold credit packages to car buyers.
‘These arrangements had been seen to incentives brokers to sell higher cost loans than were appropriate for the riskiness of the prospective borrower,’ said Steve Clayton, head of equity funds at Hargreaves Lansdown.
Stuart Masson, editorial director at The Car Expert, explained that prior to the ban the business manager at car dealerships ‘had the ability’ on many deals ‘to manipulate the interest rate to suit the commission being paid to the dealer’.
‘So if they wanted to discount to a certain level, then then they could do to make the car cheaper,’ he added.
‘But of course, that was that was never really disclosed.’
Masson added that the FCA’s latest move suggests ‘it’s a bigger issue than probably they or anyone else realised’.
He said: ‘You’re looking at millions of car finance deals per year organised in the UK – how many of those are potentially dodgy to the point where you’re looking at a legal case? No idea.
‘But they’re all worth thousands of pounds – the average borrowing on a new car is £25,000 and the average borrowing on a used car is £10,000.’
While rate manipulation was taking place at the dealership level, these businesses were acting on behalf of the big financing companies as brokers.
The UK’s biggest motor finance firms are Barclays Partner Finance, Santander UK, Lloyds Bank, Nationwide Building Society and Royal Bank of Scotland, according to analysts at Mordor Intelligence.
The probe will apply to car finance purchased before 28 January 2021, including hire purchase agreements, such as personal contract purchases, and instances where a lender and broker had a discretionary commission arrangement.
It does not apply to hire agreements, such as a personal contract hire.
The ban led to a surge in customer complaints to firms over purchases made prior to 2021, which the companies have rejected – thereby leading to legal battles in the County Courts and with the Financial Ombudsman Service.
The FOS has recently found in favour of complainants in two recent decisions, which the FCA anticipates will lead to the service being overwhelmed by a deluge in new claims.
‘Some recent [FOS] decisions have set precedents that suggest that more widespread compensation may be required for customers who were unfairly sold high-cost loans,’ added Clayton.
Consumers will have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual six months.
The FCA has also initiated a nine-month pause on the eight-week deadline motor finance firms face to provide a response to customer complaints, in efforts to ‘prevent disorderly, inconsistent and inefficient outcomes’.
The regulator added: ‘The 37-week period will enable us to analyse the issues and decide what, if any, further action including legal steps are necessary.
‘We may need to extend the pause if more time is required to make sure [complaints are dealt with properly and] consumers who might be owed compensation receive it.’
Return of the PPI ‘ambulance chacers’?
Responding to the FCA’s probe, director general of industry body the Finance & Leasing Association Stephen Haddrill said the move comes after ‘speculative and unfounded complaints issued by claims management companies’.
‘We will work with the FCA over the coming months to resolve this issue,’ he added.
Car Expert’s Masson, said: ‘Ambulance chasers only have business if there’s an ambulance to be chased.
‘If the claims management companies and the law firms can get ahold of significant evidence of widespread activity that’s prejudicial to the customer’s interest, it could be a massive multimillion pound issue.
‘Whether they can actually find that sort of information and prove it in, in a court of law – Who knows?’
But former vehicle finance director at the National Association of Commercial Finance Brokers Graham Hill said there has likely been an increase in claims as ‘compensation is in the air thanks to the Post Office scandal’.
He added: ‘I have had discussions with many claims companies (one specialising in class actions) and they all have an appetite for commission disclosure claims.
‘This FCA extension simply leaves the door open for more claims.’
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