Everything you need to know about £16billion car finance scandal ahead of huge ruling in DAYS – could you be owed cash?
A decision is set to be made in days as to whether £44billion worth of cash should be handed out by motor finance providers as compensation for undisclosed broker commission arrangements.
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Millions of drivers could be owed compensation if the Supreme Court rules in favour
The Court of Appeal ruled in October that the firms broke the law by not telling borrowers about the broker commission terms.
The case has now been taken to the Supreme Court, which will decide on Friday whether customers can be compensated.
Lenders including Barclays, Lloyds, Santander UK and Close Brothers may be liable to pay out £44billion in compensation, analysts have suggested.
However, there have been recent reports that the Government could step in to limit the compensation claims.
Reporting in The Guardian suggest Chancellor Rachel Reeves may step in to overrule the Supreme Court's decision over concerns about what such a hefty sum of compensation could do to the industry.
These laws would set clear rules on disclosing broker commission fees and could even apply retroactively to existing cases.
The move would be almost unprecedented from the Treasury and would prevent the scandal spreading to other financial products beyond car loans.
The Financing and Leasing Association, which represents motor finance companies, has warned the decision could harm the motor finance market if it's upheld.
They say it could lead to less lending, higher borrowing costs, and even company closures.
Courmacs Legal, a law firm representing 1.5million car finance victims, warned millions of consumers could be harmed if the Government does decide to cap or limit the financial redress for car finance victims.
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Darren Smith, the law firm's managing director, said: "The billions owed to victims would undoubtedly help generate economic growth just as in the PPI scandal.
"Doing right by consumers is also good for the UK economy."
What did the courts find?
Regulators and courts have found that many of the car finance deals signed between 2007 and 2021 did not properly inform consumers about charges and commission.
This is because banks allowed car dealerships and brokers to set their own interest rates on loans.
Under these now-banned discretionary commission arrangements (DCAs), dealerships and brokers had a financial incentive to charge higher interest rates, as their commission increased proportionally.
But many customers were not aware of this practice.
What is the FCA investigating and who is eligible for compensation?
What is being investigated?
The FCA announced in January 2024 that it would investigate allegations of "widespread misconduct" related to discretionary commission agreements (DCAs) on car loans.
When you buy a car on finance, you are effectively loaned the value of the car while you pay it off.
These loans have interest payments charged on top of them and are often organised on behalf of lenders by brokers - usually the finance arm of a dealership.
These brokers earn money in the form of commission - a percentage of the interest payments on the loan.
DCAs allowed brokers to, to a certain extent, increase the interest rate on a loan, which in turn increased the amount of commission they received.
The practice was banned by the FCA in 2021.
Who is eligible for compensation?
The FCA estimates that around 40% of car deals may have been affected before 2021.
There are two criteria you must meet to have a chance at receiving compensation.
First, you must be complaining in relation to a finance deal on a motor vehicle (including cars, vans, motorbikes and motorhomes) that was agreed before January 28 2021.
Second, you must have bought the vehicle through a mechanism like Personal Contract Purchase (PCP) or Hire Purchase (HP), which make up the majority of finance deals and mean you own the vehicle at the end of the agreement.
Drivers who leased a car through a scheme like a Personal Contract Hire, where you give the car back at the end of the lease, are not eligible.
How would customers get compensation?
If the Supreme Court rules to let customers be compesated, industry regulator the Financial Conduct Authority (FCA) may set up a formal redress scheme.
The regulator began working on the redress scheme in January last year.
The FCA has said it may set up the scheme as a way that reduces the scope for consumers to hire lawyers to make claims on their behalf.
Instead, the regulator could ask the lenders who carried out the mis-selling to check their records to decide who could get compensation.
But less than a quarter of people surveyed said they would trust the lenders to do this fairly.
A redress scheme would rely on lenders to identify and trace victims of mis-selling but could miss out significant numbers of people who should get compensation.
This is because they may have moved house or changed other important personal information such as their legal name.
Plus, 36% of potential claimants - around 8.4million people - said they have lost some of the paperwork from their previous car finance deals.
Are you due compensation?
More than 23million people believe they could be in line for compensation, polling by consumer law firm Slater and Gordon suggests.
The poll found that 45% of people believe they are likely to be eligible for some sort of compensation over motor finance deals signed between 2007 and 2021.
Consumer groups have estimated that motorists took out more than 30million car loans over those years.
If you think you should be compensated, consumer finance website MoneySavingExpert.com offers an email template to help you complain to your finance provider.
To download this, visit moneysavingexpert.com/reclaim/reclaim-car-finance.
You can also complain directly to your provider without using the template.
Anyone who took out car finance should file a claim, even if their previous one was denied.
In your complaint, ask whether you were overcharged due to your broker receiving a commission and ask the company to rectify this if it happened.
If you are not happy with the company's response then you can escalate your complaint to the Financial Ombudsman Service for free.
You have until July 29, 2026, or up to 15 months from the date of the company's final response letter to do so, whichever is longer.
Avoid using a claims management firm as they will take a portion of any successful claim.
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