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Car finance claims - what PCP car buyers need to know
Judges at the end of October said it was unlawful for commissions to be paid without the borrowers' knowledge or consent.
The court ruled consumers must know all the material facts that could affect their borrowing decision including the total commission to car dealers, and how it was calculated, in order to be able to consent to the loan.
The case was brought against FirstRand Bank and Close Brothers, but could open the floodgates to thousands more claims against other lenders.
Close Brothers shares plunged 15% in the hours after the decision.
Both companies said they will appeal the decision.
Meanwhile Lloyds Banking Group, the biggest UK motor finance provider, has set aside £450m for potential compensation claims. It said it had stopped paying commission to car dealers for its loans and its shares have fallen 14% in the two weeks since the ruling.
The case has brought the issue of mis-sold car finance back into the spotlight, with drivers who bought their vehicle on Personal Contract Purchase (PCP) or Hire Purchase urged to check if they can make a claim.
FCA investigation into car finance commission
The court case is separate to a Financial Conduct Authority investigation into the same practice, which will conclude in May 2025. But it could potentially influence the FCA's conclusion - the FCA, which is the regulator for the UK’s financial services, said it was carefully considering the court case result.
NimbleFins previously reported how millions of pounds in overpaid interest may need to be returned to drivers who bought their car, van, campervan or motorbike on finance. The issue, which analysts say could become the next PPI scandal, affects those buying second hand as well as new vehicles.
More than 10,000 drivers complained to the Financial Ombudsman Service - the free body which resolves complaints against financial services companies. And there are "many more waiting in the wings" believing they had paid over the odds, according to the FOS.
Read our story here to find out more.
According to the FCA, lenders are rejecting most of the complaints it receives claiming they haven't acted unfairly and haven't caused customers to lose out.
The FCA is reviewing the issue "to make sure that, if you're owed compensation, you get it in the best way possible".
The FCA's investigation relates to vehicles bought on finance before January 28 2021 where drivers weren't made aware of the discretionary commission arrangement.
If it concludes there has been widespread mis-selling of car finance agreements before this date, it will ensure compensation is paid out.
In an update at the end of September 2024, the FCA said: "We’re now planning to announce the findings of our investigation and next steps in May 2025. This will give us the time needed to assess whether we should allow firms to handle complaints in the usual way or introduce a different approach.
"While we’re investigating, we’ve also extended the deadline that providers (lenders or brokers) have to respond to certain car finance complaints to after 4 December 2025.
More information about the issue can be found on the FCA website.
PCP car finance claims
PCP car finance claims relate to vehicle owners who bought their car, van or motorbike using what is known as a Personal Contract Purchase.
This is the name given to the loans sold to enable customers to buy a vehicle when they can't pay the whole amount up front.
They are cheaper than taking out a personal loan or using a hire purchase scheme and involve a deposit and monthly payments. At the end of the contract customers can return the car, upgrade to a new one, or make a final payment to own it, based on its estimated worth at the end of the payment term.
Lenders can pay car dealers a commission for any PCP car finance agreement they sell.
Before January 2021, some lenders allowed brokers, such as car dealers, to increase car finance interest rates so they could take a higher commission.
However, thousands of customers have complained about not knowing this commission - and higher interest rate - was being charged.
The so-called discretionary commission arrangement was banned by the Financial Conduct Authority (FCA) in 2021 to stop incentivising brokers to increase the amount people were charged for loans.
About 40% of car loan deals were thought to use a discretionary commission arrangement, and these customers may be able to claim compensation.
Car finance claims how far back
If you were sold a car, van, motorbike or campervan on finance between April 2007 and January 28 2021 and weren't made aware of the discretionary commission arrangement you may be entitled to compensation.
The vehicle had to be used primarily for personal use, not business.
How long do car finance claims take
At the moment, customers are urged to lodge their complaint with the FCA ready for the conclusion of its investigation in May 2025.
Some people have already begun to receive money via the Financial Ombudsman Service by taking matters into their own hands. The FOS helps to resolve complaints against any body regulated by the FCA. Many have taken their case to court and won.
The FCA says the deadline for compensation claims is a maximum of six years from when your finance agreement started, or three years from when you became aware you had a cause to complain.
The lender will send you a letter of acknowledgement but doesn’t have to send a reply until after December 4 2024 after the FCA gave it more time due to the influx of complaints being lodged.
Some firms who specialise in only PCP claims say you can request compensation for up to 10 years after the agreement. It is not essential to use a claims specialist and we have details further below on how to send a letter of complaint to your lender to find out if you’re eligible for compensation.
Car finance claims how much will I get
The amount of compensation paid for mis-sold car finance will vary for each individual. Some claims management firms say the average secured was £3,000, although others have said much more modest amounts.
The FCA said that a typical £10,000, four-year car finance deal may have seen a customer pay £1,100 too much interest.
There is the potential for lenders to pay interest on top of that.
The Financial Ombudsman Service has already sided with motorists against Lloyds Banking Group's car finance arm, Black Horse, and Barclays Partner Finance.
In these cases victims were paid the difference between the interest rate charged and the lowest available rate at the time.
Another firm, Bott and Co, said the average payout was estimated at £1,600.
The FCA has also warned other car lenders to set cash aside cash for potential payouts, which some analysts believe could add up to £8-£13 billion.
Car loans worth £16.9bn were issued in 2023, the Guardian reports.
As mentioned earlier, Lloyds Banking Group, the biggest UK motor finance provider, has set aside £450m for potential compensation claims.
Martin Lewis car finance claim
To use it you add in some details and a letter is automatically produced, and signed by Martin himself.
Once you have the letter, send it to the loan provider, not the car broker you bought your car with. So perhaps your car finance loan was provided by Black Horse, in which case, send it to them.
Mr Lewis said: "These finance firms let brokers and car dealers make up the interest rates so they could charge more interest, so they got bunged more commission and they didn't tell you that.
"So you couldn't negotiate, you didn't know it wasn't a fixed interest and you could bring it down, which means millions of you overpaid crucially, without knowing.
"So you will not know if this was you. That's why it's so big and important."
When will car finance claims be paid
Claims management firms say it can take six to eight weeks for a PCP car finance compensation claim to be paid and many are offering a no-win no fee deal.
MoneySavingExpert has launched its own reclaim tool which helps you draft a letter to the lender, signed by Martin Lewis. Although it is not clear how long it is taking users to get compensation.
If the FCA decides to enforce an official compensation scheme - which will see all those affected paid, regardless of if they have made a complaint, this will launch in 2026.
Drivers are encouraged to log their complaint with the FCA sooner rather than later in case the FCA puts a time limit on the issue in future.
When to complain to the Financial Ombudsman Service
It is a personal decision whether you take your case to the ombudsman and some have decided to take their case straight to the FOS rather than wait for the FCA’s investigation to conclude.
But there are time limits as to when you must contact the FOS.
The FCA says:
- If you’re sent a final response between 12 July 2023 and 29 April 2025, you’ll have until 29 July 2026 to take your complaint to the Financial Ombudsman.
- If you’re sent a final response between 30 April 2025 and 29 January 2026 you’ll have 15 months from the date the final response is sent to refer your complaint to the Financial Ombudsman.
More information can be found on the FCA website here.
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