How can you tell if you've been mis-sold car finance and what can you do about it?

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Thousands of drivers may have been put on a higher interest rate without realising when buying a car on finance.

Some dealers or brokers earned a better rate of commission if car buyers were placed on higher interest rates.

The latest news from the Financial Conduct Authority (FCA) would mean banks would be forced to proactively tell customers if they had been mis-sold car finance.

In a recent Court of Appeal case, three people claimed they hadn't been aware of this when they purchased their vehicles.

The ensuing scandal could end up costing lenders hundreds of millions of pounds to rectify.

Here's everything you need to know about it.

The car finance scandal - what exactly happened?

When you buy a car on finance, you are effectively loaned the money, which you pay off in monthly instalments. These loans carry interest, organised by the brokers (the people who sell you the finance plan).

These brokers earn money in the form of a commission (which is a percentage of the interest payments).

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Before January 2021, some car finance lenders had what was called a "discretionary commission arrangement" (DCA) with brokers.

Under these arrangements, brokers earned more commission if buyers were put onto a higher interest rate - this incentivised sellers to maximise interest rates, which meant many were unfairly charged too much.

The Financial Conduct Authority (FCA) banned this practice in 2021, but a high number of consumers have complained they were overcharged before the ban came into place. The Financial Ombudsman Service (FOS) has 20,000 open complaints they are dealing with.

What is the investigation?

In January 2024, the FCA announced a review into whether motor finance customers had been overcharged because of past use of DCAs. They paused the eight-week deadline for firms to respond to complaints and are now assessing thousands of records spanning 14 years.

The FCA is using powers under the Financial Services and Markets Act 2000 to review historical motor finance commission arrangements across multiple firms - all of whom deny they have acted inappropriately.

The FCA is now looking into a "consumer redress scheme" to see if this is a better way of compensating people en masse.

What is the latest development?

In March, the financial conduct authority said it will announce its decision on a redress scheme - which would mean lenders would have to proactively decide if customers had been affected - within six weeks of a decision following a landmark supreme court hearing early next month.

This would mean individuals wouldn't need to complain, but they would be paid out an amount dictated by the FCA.

What's happening next?

The Court of Appeal ruling (which sided with the consumers) has set a precedent for the industry by ruling that any dealers receiving commission from lenders must ensure their customers are fully informed about the arrangement.

This ruling is being disputed by multiple lenders, including Santander and Lloyds, but could see big changes in the industry as well as a large influx of complaints.

The FCA will publish the findings of its investigation in May 2025, as well as outlining the next steps. That will be published on the FCA website.

How to tell if you have been affected

Motor finance serves over two million consumers a year, and the FCA says you may have been affected if you:

Bought a car under a finance scheme before 28 January 2021
There was a discretionary commission arrangement between your lender and broker.

Firms involved include Barclays, Santander, Close Brothers and Lloyds Banking Group (which organises loans through its Black Horse finance arm - and also happens to be the UK's largest motor finance provider).

These lenders have been warned to set aside money to deal with claims.

Lloyds has already set aside £450m to cover compensation payments.

If you aren't sure, you can write to the broker and lender - Which? has a handy template letter you can use.

Okay, so I am affected - what do I do now?

If you find you have been mis-sold, the first step is to contact the firm that sold you the car finance product. Wait for its final response, and if you are not happy with what they say, escalate it to the Financial Ombudsman Service.

The FCA has suspended the eight-week deadline for providers to get back to you, so you may find yourself waiting a little while.

But they have also extended the deadline for you to refer your complaint to the ombudsman - you now have 15 months rather than six months after getting your final response.

Be wary of claim management firms - there are plenty of adverts on social media encouraging drivers to enlist their services. If you use one of these services, you will have to give part of any payout to the firm. But there is no reason you can't manage it yourself, using the steps above.

How much compensation could you be due?

In one ombudsman case, the driver was found to have been charged interest of 5.5% when it could have been sold at 2.49%.

The lender was told to pay the difference between payments, plus 8% interest on each overpayment.

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