Fear of delay over loan scandal payouts

People who were mis-sold finance deals when they bought cars can delay potential compensation payouts.

A decision by judges at the Court of Appeal has blown open an ongoing saga into hidden commission payments, with buyers potentially in line for payouts totaling billions of pounds.

Now the Financial Conduct Authority (FCA) is consulting to give traders extra time to deal with complaints.

However, lawyers say this could further delay compensation to be paid to car buyers who may not have given their informed consent to the commission payments.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

In a complicated and protracted series of developments, many of these agreements have come under scrutiny.

In 2021, the FCA banned transactions in which the merchant received a commission from the lender based on the interest rate charged to the customer. It said this provided an incentive for a buyer to be charged a higher than necessary interest rate.

Since January, consideration has been given as to whether compensation should be paid to people with these transactions before 2021.

This has created the prospect of payments from banks and other lenders totaling millions of pounds.

Last month, a ruling at the Court of Appeal widened the net of those who could receive compensation, possibly pushing the lenders’ final bill into the billions of pounds.

While the initial investigations surrounded discretionary commission arrangements, which were banned in 2021, the Court of Appeal decision extended the scope to any car finance commission.

The three judges unanimously agreed that it would be illegal for the lender to pay any commission to the merchant without the informed consent of the buyer.

In other words, customers must be clearly told how much commission will be paid, and agree to it, without those details being buried in the terms and conditions of the loan.

The trial included the test case of Marcus Johnson, 34, of Cwmbran, Torfaen, who bought his first car – a Suzuki Swift – in 2017.

He was not informed that the car dealer was being paid 25% commission, which was added to what he had to pay back.

“I signed some documents and then drove away in the car,” he said told the BBC.

He said he had no choice but to use finance when he bought the car, describing it as “heartbreaking” to find out so much extra money had been taken.

“Somebody in my situation at the time, who couldn’t buy that kind of old car with cash, you would use finance,” he said.

After the judges’ decision in his – and two other car buyers’ – favour, banks set aside millions of pounds for possible compensation. Other lenders have temporarily suspended any new transactions.

It is thought that the cost of compensation could reach £16bn, according to analysts.

The FCA said the decision could lead to traders receiving a flood of new complaints.

Some may come from people who previously said they had no claim for compensation because they did not have a discretionary commission arrangement.

The regulator is consulting on extending the time car dealers will have to respond to complaints.

It also wants the Supreme Court to quickly decide whether to reconsider the Court of Appeal’s ruling.

It wants an orderly compensation system, if it comes to that.

The Finance and Leasing Association, the trade body for car finance providers, described the FCA’s plan as a “sensible step”.

However, others have questioned whether this creates a further compensation delay for those who have been mis-sold these agreements.