Mike Dailly: What to do if you have a car finance mis-selling claim
Last October, the English Court of Appeal held that car sales firms couldn't lawfully receive commission from finance companies unless they had the customer's "fully informed consent".
On Friday, the UK Supreme Court (UKSC) gave its ruling in the three linked appeal cases of Hopcraft, Johnson and Wrench. It decided car firms didn't owe their customers a fiduciary duty when arranging car finance.
A fiduciary duty is a legal obligation to act in someone's best interests – like a trustee would owe to a beneficiary or a director owes to a company.
The lack of a commission disclosure applied to almost all car finance agreements, so any claim based purely on that point is now lost.
However, in the case of Johnson, an unfair relationship challenge was upheld under section 140A of the 1974 Consumer Credit Act.
The UKSC said, 'the size of the commission paid by FirstRand (the lender) to the dealer was significant, amounting to 25 per cent of the advance of credit and 55 per cent of the total charge for credit (comprising interest and fees). The fact that the undisclosed commission was so high is a powerful indication that the relationship between Mr Johnson and FirstRand was unfair'.
Car finance is a £40 billion per year business in the UK. Traditionally, most people would buy a car using a hire purchase (HP) or conditional sale agreement – both types of consumer credit where you own the car at the end of the agreement.
After the financial crisis of 2008, personal contract purchase (PCP) grew to become the most popular form of credit to buy new and used cars in the UK.
After an initial deposit, the monthly payments are lower than HP and after a few years you can either make a 'balloon payment' to own the car outright or swap the car for a new model. 83 per cent of car finance deals use PCP.
Car dealers generally act as brokers for lending companies. Until January 2021, dealers were able to set the interest rate on loans within a low to high range – known as a discretionary commission arrangement (DCA).
Their customers didn't know the car dealer would get a higher DCA if they persuaded you to accept a higher interest rate.
This unethical conflict of interest was banned by the Financial Conduct Authority (FCA) in January 2021.
But 40 per cent of car finance deals involved DCAs – the number of consumers with pre-January 2021 car finance who might have a valid claim runs into the millions.
DCAs fall foul of the FCA's regulatory rules on fairness and transparency. The FCA is expected to announce a consultation on a 'redress scheme' under section 404 of the 2000 Financial Services and Markets Act by today.
If this happens, the scheme will be free and easy to use. If you think you're affected don't use a CMC – why give a claims farmer a third of the hard earned cash you've already paid when you can do this for free?
You can get free guidance on how to claim under any redress scheme from MoneySavingExpert.com and other trusted consumer guides.
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