Need to Know: Am I eligible for car finance compensation?

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The financial regulator is investigating claims that consumers were mis-sold car loans between 2007 and 2021 by brokers and lenders.

Some motor finance companies and brokers used discretionary commission arrangements (DCAs) — which allowed brokers to set higher interest rates and receive a higher commission.

The practice was banned in 2021, but since then consumer disquiet has grown, with providers rejecting most complaints.

This prompted the Financial Conduct Authority this month to order motor finance companies to pause handling of complaints for nine months while the regulator investigates the matter. If the outcome is a redress scheme, it could cost the industry £13bn, according to investment bank Jefferies.

“There’s a tsunami of claims coming,” said Mike Ward, executive chair of Armalytix, a customer compliance data group. “This break is to creating an orderly and fair process for people to have their claims heard.”

Who could be eligible for compensation?
People who used finance to buy a car from April 6 2007 to January 28 2021, including those who used a hire purchase agreement, may be eligible to make a complaint.

The standard three- and six-year rule applies, whereby consumers must submit a complaint within six years of the event or three years from when they became aware of the issue, or could reasonably have been expected to become aware of it.

If a consumer has already complained to one of the companies that gave them a car loan and had their claim rejected between July 12 2023 and January 10 2024, the FCA has extended the time they have to take their complaint to the Financial Ombudsman Service (FOS) from six to 15 months.

What should I do?
Since complaints handling has been paused, any open or new complaints will not receive a response before September 25. However, consumers can submit complaints now to avoid hitting the three- and six-year limitations on complaints.

Consumers can ask their lenders and brokers directly if they used DCAs during the period they took out their loans, or if they were used in their deal.

“It is always sensible to ask both parties, because if these complaints can go back to 2007, brokers and lenders might not have the details of all the arrangements in place for those early agreements,” said Kate Robinson, principal at Avyse Partners, a regulatory consultancy. “If you write to both, one might have better records than the other.”

When the FCA has concluded its investigation it may offer redress to all customers it regards as affected, or offer compensation based on selective cases.

“The options are to continue with the complaints process, or something more radical like a consumer redress scheme right across the sector,” said Jason Wassell, chief executive of the Consumer Credit Trade Association. “But there are probably points in between where you continue with the complaints process, but with more guidance from the FCA.”

Consumers can also gather evidence on whether the lender and broker were fully transparent with them about the deal.

“It might not just be the DCA — it might be the transparency around it, how the broker spoke to the customer at the time and how it was disclosed,” said Robinson. “There might have been pressure selling . . . those aren’t DCA complaints but they are really valid ones that a customer should consider.”

Should I use a claims management company?
Once a consumer has established whether there is cause for complaint, they can lodge a complaint independently, or use a claims management company.

Money Saving Expert, the advice website, has a template letter consumers can send directly to car finance companies, and advice on how to escalate a complaint to the FOS if they are dissatisfied with the result.

Claims management companies charge a fee for their services. If a redress amount is less than £1,500, consumers can only be charged whichever is the lower sum: 30 per cent of their claim or £420. For claims under £10,000 the cap on fees is 28 per cent or £2,500; it is 25 per cent for claims under £25,000 or a maximum of £5,000. Charges for those under £50,000 are capped at 20 per cent or £7,500, while the cap for redress over £50,000 is 15 per cent or £10,000.

However, claims management companies say they can help simplify a complex process and fight for higher levels of compensation for customers.

“Knowing who to present a claim to can be a minefield,” said Simon Evans, chief executive of the Consumer Redress Association. “Third party firms can also look at the data and know whether what’s being offered to consumers is a fair offer.”