Taken out a car loan? Here’s why you may have been overcharged and in line for a payday

Millions of people who bought cars on finance could be in line for compensation after the financial regulator launched a probe into vehicle loan companies for overcharging customers and unfairly rejecting their complaints.

The Financial Conduct Authority (FCA) will spend nine months investigating the UK motor finance market and hinted that if it finds widespread wrongdoing, it could provide an automatic compensation scheme that could see customers receiving thousands of pounds.

Martin Lewis, founder of Moneysavingexpert.com, said the redress could be on the same scale as compensation for missold Payment Protection Insurance (PPI) where those affected received a collective £40 billion. ‘We’re possibly talking thousands back for many,’ he added.

Investigation: The FCA has launched a probe into vehicle loan companies for overcharging customers and unfairly rejecting their complaints

The misselling affects car loans taken out before 2021, when a practice known as ‘discretionary commission arrangement’ was finally stopped by the regulator. This arrangement meant that credit brokers – who were often the car dealers themselves – were able to adjust the interest rate that the customer received on their car loan.

The higher the rate the customer paid, the higher the commission for the broker, creating an incentive for them to sell expensive credit.

Most customers were unaware of this practice and a judgment by official complaints handler the Financial Ombudsman Service (FOS), also published last week, suggests that it cost them an extra £1,100 on average on a four-year, £10,000 loan.

‘Millions of consumers have lost billions because they were charged inflated prices as the result of secret commission deals,’ says Alex Neill, co-founder of free complaint service Consumer Voice.

Since the FCA banned discretionary commission, complaints made about this practice have soared. Recent data from the Financial Ombudsman, the final arbiter in disputes between customers and lenders, says complaints about motor financing are at a five-year high, and make up a quarter of its workload.

And the regulator believes it will see a ‘significant uplift in complaints from consumers’ after two judgments from the FOS last week forced lenders Black Horse and Clydesdale, which is an arm of Barclays Partner Finance, to compensate customers who had been sold loans with discretionary commission.

These customers, and many more, had their initial complaints rejected by lenders, which deny that the discretionary commission practice does not treat customers fairly.

The FCA says that these decisions, along with some county court battles that found in customers’ favour, suggest that lenders may be rejecting complaints that should be upheld.

Sheldon Mills, the FCA’s executive consumer director, says that the regulator is ‘taking a closer look’ and will press pause on the complaints procedure while it does so. 

The pause is expected to last nine months, during which lenders will not respond to new or current complaints. Customers will also have 15 months, instead of six, to refer complaints to the FOS.

Mr Mills said that the FCA would announce next steps in the third quarter of this year.

‘If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way,’ he says. His comments raise hope of an automatic compensation scheme that does not require borrowers to complain individually to receive a payout.

If those payouts are in line with the recent FOS decisions, customers should receive the difference between the lowest rate they could have received from the lender without commission for the broker, as well as eight per cent interest on the overpayments over the life of the loan. Any future loan payments should also be reduced to a lower rate.

There is no guarantee that a redress process will be put in place, however.

If it is not, consumers would still have the right to complain to individual lenders and go to the ombudsman if they are not satisfied with the outcome.

In advance of any decision, those who have taken out car finance should look for paperwork or any other evidence that they had the loan. Even a bank statement can help to prove that you made the loan payments.

Policy notes from the FCA on their investigation suggest that borrowers may get compensation for policies taken out as early as 2007.

The FOS can usually investigate within three years of when you should reasonably have become aware that there was a problem with your financial product, so it is worth having these details even for loans that are more than a decade old, as most people have only just become aware of discretionary commission arrangements.

This post first appeared on Dailymail.co.uk