The Financial Conduct Authority (FCA) is investigating car finance arrangements amid concerns that millions could be owed compensation on car finance deals made before 28 January 2021.
The Financial Conduct Authority (FCA) began looking at this in 2017 amid concerns about discretionary interest commissions. Sales staff could adjust the interest rate on car loans and receive commission. The higher the interest rate, the more commission a sales person would receive.
The FCA banned this in January 2021 and cited it would save motorists an estimated £165m a year.
The FCA is using its powers under s166 of the Financial Services and Markets Act 2000 to review historical motor finance commission arrangements and sales across several firms.
Car finance – flood of complaints
This ban triggered a flood of complaints from motorists about how much they were charged before the ban, with claims handlers getting involved. Interestingly, their success rate is only 8% -v- 42% for consumers.
The Financial Ombudsman Service complaints about car finance saw a sudden surge from Q2 2022/23. The ongoing cost-of-living crisis and relentless pressure on household budgets probably explains this.
Lenders and brokers have taken a robust stance and rejected most complaints because they believe they have not acted unfairly.
The FCA are assessing the extent of the problem to make sure that consumers get compensation in the best way possible.
Financial Ombudsman Service car finance decisions
The Financial Ombudsman Service (FOS) has recently ruled in favour of two complaints against Clydesdale Financial Services Limited in November 2018 and Black Horse Limited in April 2016.
Both decisions revolved around discretionary broker commission models where the customer cited they were not made aware at the point of sale.
Other complaints have been successfully pursued through the County Courts.
These latest decisions suggest that lenders and brokers are rejecting legitimate complaints against consumers.
The FCA expect this will open up the floodgates for more complaints being lodged.
A Pause on Complaints
Providers usually have 8 weeks to respond to complaints. If they miss that deadline, consumers can simply refer their complaint to the Financial Ombudsman Service without a deadlock letter or final response.
This latest update gives lenders and brokers a new deadline of 25/09/2024 to respond to complaints.
You usually have up to 6 months to refer a complaint to the FOS on receipt of a final response from a lender. This is now being extended by up to 15 months if consumers received a final response between 12 July 2023 and 20 November 2024.
The FCA have concerns about widespread evidence of misconduct and expect a high number of complaints, given that up to 90% of cars are financed by PCPs (Personal Contract Plans).
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.”
Treating Customers Fairly
Consumer complaints need to be treated fairly and the FCA cite there is a risk this might not happen due to the sheer volume of complaints they expect the Financial Ombudsman Service (FOS) to receive.
Abby Thomas, Chief Executive and Chief Ombudsman of the Financial Ombudsman Service, said:
When people take out a car loan it’s imperative they are treated fairly and the financial implications are totally transparent.
Unfortunately, that is not always the case. We’ve heard from more than 10,000 people who fear they were charged too much for their finance, and we know many more are waiting in the wings.
We’ve resolved two complaints where we found that the way the commission arrangement between the lender and the car dealer worked was unfair on the consumer. Our decisions could signal the way forward for many more similar complaints that have not been resolved between firms and consumers.
That’s why I welcome the Financial Conduct Authority’s decision to assess this issue further. In the meantime, we’re totally committed to continuing to investigate cases with our service.
If people are concerned about their car loans and are unhappy with how firms have responded, they can come directly to our free, independent service and we will investigate their complaint.”
What will the Financial Conduct Authority’s decision means for consumers?
This latest decision and update is good news for consumers as it gives them a 9 month extension to lodge complaints with the Financial Ombudsman Service (FOS).
The downside is that there is likely to be more delays on final response decisions from lenders and brokers who will be faced with a surge of complaints to investigate.
If the Financial Conduct Authority (FCA) finds evidence of misconduct, what do the next steps look like?
The FCA banned discretionary interest commission payments to sales staff in January 2021 amid concerns that consumers were being ripped off by unscrupulous sales staff.
This was estimated to save consumers up to £165m a year.
Car finance and insurance complaints hit a five-year high according to the Financial Ombudsman Service, who released their latest quarterly report on 14 December 2023.
The Financial Ombudsman Service complaints about car finance saw a sudden surge from Q2 2022/23. The ongoing cost-of-living crisis and relentless pressure on household budgets probably explains this.
Car finance is the 4th most complained about product according to the FOS who uphold 36% of all complaints received in favour of consumers.
This latest press release relates to all cases before 28 January 2021 (not after) where discretionary commission arrangements were used.
A ticking time bomb has finally exploded
The Bank of England voiced concerns in 2017 about the rapid expansion of car finance and how easy it was for anyone to get a new car;
https://www.autocar.co.uk/car-news/industry/insight-rise-pcp-car-deals-cause-concern
The Financial Conduct Authority (FCA) announced in 2017 that it was ‘conducting an exploratory piece of work’ on motor finance. In their 2017 business plan, it said: “We are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry. Following the review, we will assess whether and how to intervene in the market”.
https://www.fca.org.uk/publication/business-plans/business-plan-2017-18.pdf (page 74)
Philip Nothard, retail and consumer specialist at CAP, voiced concerns in 2017 that PCPs raise people’s expectations in good times, only to dash them in bad times.
Prophetically, he said at the time, “Today’s deals are so strong that a lot of people are driving premium cars who shouldn’t be.
In 3 years’ time, when interest rates rise, when exchange rates aren’t so good and when car makers’ incentives aren’t so generous, those same people will be forced to take out a PCP on something less aspirational.
Car manufacturers have a responsibility to keep in mind the future state of the market, so customers end their contracts in a more positive position”.
Covid and furlough schemes
Up to 1.5m consumers were facing serious financial difficulties with PCP car finance schemes in August 2020.
The Covid furlough scheme ended in October 2020 with 1 in 4 jobs (9.4m) on the line.
6.5m new and used cards were on finance at the time with around 90% on PCPs.
6.5m cars on finance x 90% on PCPs = 5.85m x 25% (1 in 4 on furlough) = 1.46m consumers.
Car dealerships and motor finance brokers received commission linked to interest rates consumers paid. This created an incentive to sell more expensive credit.
The broker could effectively set the interest rate. The FCA found that the widespread misuse of this type of commission created an incentive for brokers to act against consumer interests.
Key Findings – August 2020
£300 million – total amount customers could be over-paying in interest charges per year due to mis-sold PCPs
£165 million – FCA estimates changes would save customers save £165 million a year once this practice is banned on 28 January 2021
£1,100 – average amount a single customer could be over-paying in interest charges on a typical £10,000 mis-sold PCP scheme over four years
560,000 – estimated number of customers affected by mis-sold PCPs (approx. 8.6%)
£58bn – total amount of car loans taken on by consumers in 2016
£75bn – total amount of car loans taken on by consumers in 2020
6.5 million motorists on PCPs
£2,000 – difference between the average and highest commission a broker could earn through different commission models – incentivising brokers to charge higher interest rates for higher commission
Coronavirus unveiled an array of mis-selling and sharp practices that would affect millions of customers. This was a perfect storm with the ending of the furlough scheme, a predicted second wave and a spike in mass unemployment.
Customers were expected to look for an exit from unaffordable loans and compensation to fill a void left by unemployment.
Claims handlers were ready to make this the next PPI scandal.
https://goodwinbarrett.co.uk/personal-contract-purchase-pcp-mis-selling-guide.html
Consumer Legislation
The Consumer Rights Act 2015 has a fairness test on contracts.
The Misrepresentation Act 1967 protects consumers from false or fraudulent claims that are made by the seller that induces a customer to enter in to a contract.
The Consumer Protection from Unfair Trading Regulations 2008 protects consumers from unfair or misleading trading practices and bans misleading omissions and aggressive sales tactics.
How to succeed with a complaint
Write to your lender to start the claim.
You need to know if your car finance agreement included discretionary or undisclosed commission.
This is the first step to find out if you are eligible.
You can simply send an email or a message to the car finance company saying:
“I had car finance from you in (date) – the reference number / car registration details / my name, address and DOB is (x).
The FCA have published about discretionary commission arrangements on car finance. I am concerned I may have been charged too much interest from reading this.
I would be grateful if you could to tell me if you used a discretionary commission arrangement on my finance and provide details of that arrangement.”
You can find the contact details for lenders here.
Keep a record of all conversations.
You do not have to do anything else. Do not go into detail about your claim – you simply need to find out if you have a valid claim.
What to focus on if you have a valid claim
You do not need to use a Claims Handler. This is what they would focus on – you can do it yourself.
Claims handlers are likely to focus on The Consumer Protection from Unfair Trading Regulations 2008 on contracts that;
- Fall below the good-faith standards of skill and care that a trader in the motor industry would be expected to exercise towards customers
- Omit material information that the average customer needs to make an informed decision
- Fail to identify that a transaction has a profit-making motive (where this isn’t already apparent in the contract)
- Obscure information may be construed as an omission
Claims handlers have highlighted the following aspects within this context;
- You were told it was a better deal for you, when it wasn’t.
With PCPs, you will end up paying more in interest than you would with another loan (like a hire purchase contract). If the dealer did not explain this risk to you, you could end up with a larger-than-expected interest bill at the end of the contract.
- The loan wasn’t explained properly.
In their investigations, the FCA found that many dealerships were not adequately explaining the details of the contract. This meant that consumers were signing up for a loan, without being fully aware of the terms and conditions. Another common complaint is consumers mistakenly believing that they own the car, because the nature of the agreement was not explained to them properly.
- You were offered a deal that benefitted the dealer more than you.
The FCA found that some dealership commission arrangements incentivised staff to favour loans with higher interest rates. This may not benefit the consumer, which means it’s a clear-cut case of mis-selling.
- You were offered an add-on that you didn’t need.
Some dealers offer additional products (such as insurance) to their customers. These products may be of no real benefit, and only sold to you to generate additional profit for the dealership.
Commission and mis-selling
Claims handlers are likely to focus on;
- Commission based sales on interest rates – the higher the interest rate, the more commission earned for the sales person
- Commission based on add-on extras for a vehicle that the customer does not own including tyre insurance and other policies
Does the fact the Financial Conduct Authority (FCA) intervening suggest this is widespread?
Yes. The latest decisions ruled in favour of consumers by the Financial Ombudsman Service suggests that lenders and brokers are falsely rejecting legitimate claims.
The new deadlines set for brokers, lenders and consumers suggest that this is widespread and is set to be the new PPI scandal.
How will consumers be impacted by the FCA extending the deadline to contact FOS / extending firms’ deadline to respond to complaints?
Brokers and lenders may see this as an opportunity to use sludge tactics to frustrate legitimate complaints and not respond to complaints in a timely manner.
They may fob off customers citing that the complaint is in the backlogs and is being dealt with, knowing that many consumers will simply give up and forget about it.
Many consumers risk losing out on compensation they are owed.
Do not use CMCs – Complaints Management Companies. Their success rate is only 8% -v- 42% for consumers. You can easily do it yourself for free with the Financial Ombudsman Service. You are more likely to win your case and keep all of the compensation you are entitled to.
What are your thoughts on this? Do you think you are affected?
