Drivers who took out car finance may be in line for redress if the industry watchdog’s investigation reveals “widespread misconduct” when it comes to historic secret commission in sales contracts.
The Financial Conduct Authority (FCA) is probing the motor finance market for any sign of drivers having “lost out” because of commission arrangements and sales across several firms.
The investigation been sparked after the Financial Ombudsman Service (FOS) revealed it found in favour of two complainants whose claims were rejected by the firms.
And it’s heard from more than 10,000 people who fear they were charged too much for their car finance, with “many more waiting in the wings”.
In January 2021, the FCA banned ‘discretionary commission arrangements’ where car dealers and motor finance brokers received a type of commission which was linked to the interest rate customers paid.
As brokers were effectively able to set the interest rate, this created an incentive to sell more expensive credit to some customers as they were rewarded with higher commission.
As a result, there have been a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the ban.
Yet firms have been rejecting most complaints about this commission because they consider “they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements”.
However, the FCA also today revealed that claims have been brought to County Courts, some of which have been upheld.
“So, there is significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements”, the FCA said.
Further, the FCA said these cases are “likely to prompt significant complaints from consumers to firms and the Financial Ombudsman”. As such it has paused the usual complaint deadlines as it investigates the sector “to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while we assess the issue and determine the best way forward”.
FCA: ‘High number of complaints’
Sheldon Mills, executive director of consumers and competition at the FCA, said: “We are taking a closer look at historical discretionary commission arrangements in the motor finance market following a high number of complaints from customers, which are being rejected by firms.
“If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way.”
Below, YourMoney.com explains more on who is affected, what the pause means for complaints and what the next steps could be in terms of compensation.
Car finance commission: Who’s affected?
You may be affected if you used car finance to buy a car before 28 January 2021, which includes hire purchase agreements, such as Personal Contract Purchases.
Further, it impacts you if your lender and broker had a discretionary commission arrangement.
However, it doesn’t apply if you used car finance to buy a car on or after 28 January 2021 where you used a hire agreement, such as a Personal Contract Hire.
Pause on complaints: What you need to know
You normally need to complain within six years of a problem occurring, or, if later, within three years of you becoming aware that you had cause to complain.
You need to take your complaint directly to the firm, and if it doesn’t resolve your complaint within three business days, all FCA authorised firms must reply in writing letting you know they’ve received your complaint. It should get back to you in writing within eight weeks to let you know the outcome of the complaint – whether it’s been successful or not, or if it needs more time to investigate.
If you’re not happy with the decision or don’t hear back from the firm within the time frame, you can take your complaint to the free and independent Financial Ombudsman Service within six months of receiving the final response.
If the Ombudsman finds in your favour and you agree to the terms, the firm must comply with the decision.
However, the FCA has now paused the eight-week deadline for motor finance firms to provide a final response to a relevant commission complaint.
It will last for 37 weeks (approximately nine months) from today until 25 September 2024.
It will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.
For example, if a firm had been dealing with a complaint for three weeks at 11 January 2024, the time limit for responding to the complaint would be paused for 37 weeks until 25 September 2024. When the pause ends, the firm would then have the remaining five weeks to provide its final response. If a complaint is received during the 37-week period, the eight-week deadline will expire on 20 November 2024.
The FCA said this 37-week period will enable it to analyse the issues and decide on any further action as necessary. However, it added that it may need to extend the pause if more time is required to make sure complaints are dealt with properly and so those owed compensation receive it.
If you’ve yet to complain about the relevant commission (you can ask your provider if they used a discretionary commission arrangement), the FCA said motorists may wish to wait until it finishes its probe, but people should still be mindful of time limits.
It added that affected individuals will also have up to 15 months to refer their complaint to the Financial Ombudsman, rather than the usual six months. This extension applies to complaints where the firm had sent a final response in the period beginning with 12 July 2023 and ending with 10 January 2024, or where the firm sends a final response during the period beginning with 11 January 2024 and ending with 20 November 2024.
This car finance page tells you the next steps depending if you’ve already complained and who to, depending on the relevant dates. YourMoney.com has asked the FCA about previously rejected complaints and what happens in this scenario. We’ll update this news story once we hear back.
Big compensation payout on the way?
According to Martin Lewis, founder of MoneySavingExpert.com, the FCA’s full review of complaint handling suggests something is wrong.
“My suspicion is when it finishes its investigation it will set up either a redress scheme where it orders all firms to pay redress to every affected customers even if they’ve not complained, or redress rules where it orders them to pay out redress based on a set formula to those that complain,” he said.
Lewis added: “The pay out would be either the interest on loans (which is big), the commission (which is big), or the whole loan (which is huge). We’re possibly talking thousands back for many.”
