PPI on wheels: How seven million drivers could be in line for payouts in a new scandal

Up to seven million people could be in line for compensation worth thousands of pounds after routinely being mis-sold expensive car loans by dealerships since 2014.

The emerging scandal — being dubbed ‘PPI on wheels’ after the payment protection insurance meltdown of the late 1990s and early 2000s — could leave the banks that provide the loans with a £13 billion bill.

Experts such as Martin Lewis are advising anyone who thinks they are affected to submit claims now to ensure they are treated fairly.

Although this is a fraction of the £50 billion PPI mis-selling payouts, the sheer size of the bill will yet again raise serious questions over the banking industry’s poor treatment of customers — whether savers, small businesses, or pensioners.

It also shows the City regulator in a poor light. While the Financial Conduct Authority (FCA) is now paving the way for compensation by launching a probe into car loan mis-selling, some believe it failed customers.

PPI on wheels: Up to seven million people could have been mis-sold expensive car loans by dealerships since 2014

This was centred on drivers who bought a new car using loan finance — either a personal contract purchase (PCP) plan or hire purchase (HP) agreement. 

Around nine in ten new cars are bought this way. Some 18.2 million new cars were registered in the UK between 2014 and 2021, according to data analyst Statista — and 16.4 million could have been bought using a PCP or HP.

Over this period, Martin Lewis says up to 40 per cent of these motorists — about 6.6 million — may have unwittingly signed up to a ‘discretionary commission arrangement’ (DCA). In doing so, many paid more in loan interest than they should have.

This is because the banks allowed dealerships to earn big commission payments from the loans they recommended. These costs were then passed on to customers through higher interest rates.

The FCA says a car buyer borrowing £10,000 over four years could have paid up to £1,100 more than they should have because of commission payments made to dealerships by the banks.

It is believed motorists may have paid £165 million a year in unnecessary fees.

Investment bank Jefferies has calculated the cost of making good the financial detriment at £13 billion. 

This compares to the £50 billion it cost the banks to clear up the PPI scandal, where people were sold poor-value or unnecessary cover to meet mortgage, loan, or credit card payments if they could not work through illness or unemployment.

The FCA launched its probe into DCA mis-selling after the Financial Ombudsman Service (FOS) said it had received 17,000 complaints from motorists. 

The regulator is expected to announce its findings in September when it is likely that a formal redress scheme will be set up to make it easy for victims to claim.

Tellingly, Lloyds Banking Group, whose car loan arm is Black Horse, said last month that it would be setting aside £450 million to meet potential claims. 

Yet experts believe Lloyds could be hit with a total compensation bill of more than £2 billion. Other big loan providers — including Barclays, Close Brothers and Santander — are likely to face similar bills.

Last month, Close Brothers suspended its dividend payments to shareholders because of concerns over the size of the compensation bill it could be landed with — and is putting aside a £400 million capital buffer as reserve.

Debt adviser Sara Williams, who runs consumer website Debt Camel, says: ‘Most people assumed when taking out a car loan that the interest charged was just for financing the deal. They had no idea some of the charges would be creamed off as sales commission.

‘Few people would have been aware that details of such commission payments were buried in the small print.’

She adds: ‘The way the finance was sold made borrowers vulnerable to the ruse. After being shown a car and agreeing on all the extras — for example, alloy wheels and colour — the buyer would then be offered a loan based on how much they could afford, rather than what was best for them. Often, the more they could afford, the more expensive their loan became.’

Mis-selling fears: Some 18.2m new cars were registered in the UK between 2014 and 2021 – and 16.4m could have been bought using a PCP or HP

Experts say car loan interest charges of 4 per cent or less, at a time when the Bank of England base rate was 1 per cent or lower — from 2009 onwards — may be deemed acceptable by the regulator. Those who paid more are likely to have been judged as exploited.

Anyone unsure about whether they paid too much for car finance is being encouraged to contact the dealership they got it from. They have a duty to confirm whether the loan was set up using a DCA.

Websites such as Debt Camel and consumer rights group Consumer Voice have letter templates that can be used to ensure the dealership provides the correct information. 

Alex Neill, co-founder of Consumer Voice, says: ‘This mis-selling scandal could be huge — and it is right that it is being dubbed “PPI on wheels”.’ 

She believes the regulator will want to avoid a repeat of the long-drawn-out PPI crisis. So, it is likely to produce a straightforward redress scheme.

The FOS recently ruled in favour of two motorists who took out car loans with Barclays and Black Horse where DCAs had been struck with the dealerships.

The regulator responded by launching its probe. It has now told car finance lenders that they should not resolve DCA complaints until its conclusions have been published.

And Ms Neill warns consumers to steer clear of ‘ambulance chasing’ solicitors looking to make money from the crisis.

Martin Lewis says you should start by asking your dealership if it had a discretionary commission arrangement when you bought the car, by using the letter template at moneysavingexpert.com/ reclaim/ reclaim-car-finance/#free-tool.

This can then be sent to the company, with a time-logged complaint included within the request. You will need details such as the name of the firm who provided the finance agreement, policy number (if available), your name, date of birth and address — including if it was different when the deal was taken out.

You might not get an immediate reply, though most companies should acknowledge the request within 28 days. If it says you had a DCA then you could be in line for a payout — but must wait until September for more details.

Yesterday, the FCA told Money Mail: ‘Discretionary commission arrangements created an incentive for brokers [dealerships] to increase how much people were charged for their car loan. There has been a high number of complaints from customers.

‘Lenders and brokers are rejecting most of these complaints. We are assessing the extent of the problem to make sure that if people are owed compensation, it can be done in the best way possible.’

Adrian Dally, of the Finance and Leasing Association, says: ‘Discretionary commission arrangements do not automatically mean customers lost out. In practice, having discretion to change interest rates often meant dealers lowered them to be more competitive.’

Lloyds said: ‘The £450 million [we have set aside] is in relation to motor finance commission. It is for operational and legal expenses, as well as potential redress. There remains significant uncertainty on the extent of potential redress, if any, and its timing. We welcome the FCA intervention.’

This post first appeared on Dailymail.co.uk