The victims of mis-sold car finance have been warned that they may struggle to get compensation because the payout scheme set to begin in 2026 is too complicated.
Around 14 million motorists may be eligible for a £700 payout after they were subject to hidden fees when taking out loans for their vehicles.
Car finance firms failed to properly inform customers about the commission paid by lenders to the car dealers that sold them the loan, the Financial Conduct Authority (FCA) ruled.
But the compensation scheme being set up by the (FCA) has been criticised, with campaigners fearing it will be too narrow for most car buyers to qualify.
A solicitor involved in a landmark Supreme Court case warned lenders were being left to “mark their own homework” and could avoid compensation, while consumer groups said the planned average payout was too low.
Andrew Wrench – a car enthusiast from Staffordshire who was involved in the landmark legal case – believes that the FCA's “unsatisfactory” plan will leave many motorists frustrated.
The 61-year-old postman went to court over the commission arrangements struck between his lender and his car dealer for two cars he bought on finance – a BMW and an Audi.
Wrench claimed he had not been made properly aware of the commission paid by the lender to the dealer, which may have influenced the interest rates and, therefore, the total cost of the loan that he agreed to.
Court case made 'real difference'
His claim was one of three car finance cases grouped together and decided on by the Supreme Court in August.
Wrench and another car buyer were denied compensation. However, a third car buyer – 35-year-old Marcus Johnson – was awarded more than £1,650 after the court found he had suffered from an “unfair relationship” with his lender.
The Supreme Court ruling led the FCA to announce in October that a car finance compensation scheme would be set up.
Wrench said he was “disappointed and disillusioned” that his own claim was rejected, but believes he has “made a real difference in pushing this issue forward”.
He told The i Paper: “I feel I've still won in the sense that billions will be paid out to millions of people [through the compensation scheme].
“I wasn't in it for financial gain for myself. It was about the principle,” he added. “It's given me a degree of satisfaction that the FCA has committed to some kind of compensation scheme.”
'I should have smelled something fishy'
Mis-selling has mainly revolved around commission. These payments – known as discretionary commission arrangements (DCAs) – were often hidden from car buyers, the FCA concluded.
It amounted to a major conflict of interest, since dealers could find ways to increase the car buyer's borrowing rates to earn bigger commissions.
Wrench had claimed that lender MotoNovo Finance, owned by FirstRand Bank, had been paying commission to car dealerships without him being appropriately informed.
The postman said he had not realized there was a commission of £180 on his second-hand Audi TT, bought in 2015, and a commission of £409 on a second-hand BMW 3 Series bought in 2017.
Wrench said it was only when he bought another car in 2021 on finance that he spotted a reference to a possible commission in the small print.
“The dealer did not disclose the commissions to me up front,” he said of his Audi and BMW purchases.
“I had wanted to pay cash, but they discouraged me and said, 'Let's do some number crunching. [for a finance deal]'. I should have smelled something fishy was going on.”
Compensation claims – what you can do now
If you bought a vehicle on finance between 6 April 2007 and 1 November 2024, you may be eligible for compensation.
The FCA regulator won't set out its final plan until February or March. But it has already outlined how the basic compensation scheme will work – and how you can prepare.
You can get in touch with your motor finance lender now to complain. Tell your provider about the commission on your agreement, including as much information as you can.
Those who don't complain are supposed to be contacted by their lender within six months to ask about opting into the scheme. If you do not receive a letter from your lender, you will have one year to submit a claim from whenever the scheme begins early next year.
This compensation scheme is only one route. The other option – if you think you have a strong claim – is taking your lender to court.
'I worry some people will get the brush-off'
In Wrench's case, the Supreme Court found that the terms and conditions in his finance paperwork had mentioned that commission “may” be paid.
The judgment confirmed that a DCA on its own is not always enough to make a deal “unfair” in law, and that other factors may be needed.
In Marcus Johnson's successful case, the size of the commission was particularly high – amounting to 55 percent of the total cost of his credit.
The FCA has estimated that 44 percent of all car finance agreements between 2007 and 2014 may be eligible for payouts. Lenders may be liable for up to £8.2bn in compensation, the watchdog estimated.
However, Wrench said the estimated average payout of £700 “seems like absolute nonsense”, claiming victims “should be compensated more”.
The postman also believes that the planned process for making a compensation claim – as set out in the FCA's consultation – was “too complicated”.
The FCA accepts that lenders may not be able to trace all their customers back to 2007, putting the onus on consumers.
Wrench said: “It's very unsatisfactory to make consumers work so hard to come up with information. I worry that if people don't have enough paperwork, they will get the brush-off.”
Lack of clarity on payouts, regulator told
Solicitor Kevin Durkin – who successfully represented Johnson in the Supreme Court – fears there is “not enough clarity” from the regulator on the precise circumstances that lenders must make compensation payouts.
“It looks like the FCA is allowing lenders to come up with their own remedies – to effectively mark their own homework,” said the director of HD Law. “It looks like a mechanism to payout less money.”
Consumer Voice also wants the FCA to “strengthen the scheme”. The campaign group said the proposed average payout of £700 is “too low to reflect the harm many consumers experienced”.
The lenders are also unhappy with the proposed scheme. The Finance and Leasing Association (FLA), the body representing the motor finance sector, said it could result in redress being paid to “millions of customers who experienced no unfair relationship”.
The FCA spokesperson said the feedback would “help us refine our proposals” to ensure the scheme is “fair and robust”.
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The FCA also said the scheme will be “free and easy-to-access”, pointing out that car buyers do not need legal help to claim.
MotoNovo Finance owner FirstRank Bank said in a trading statement that it believes the proposed FCA scheme “goes beyond what can be deemed proportionate”. The company declined to make any further comment.
