Who can claim a car finance fee?

The City’s regulator FCA is investigating whether millions of drivers should pay compensation for mis-sold finance deals. Here we’ll see what this means for you and whether you can claim it.

A looming car finance scandal could be bigger than the Payment Protection Insurance (PPI) saga that cost banks £50bn in damages, a lawyer working for the City’s Financial Conduct Authority (FCA) has claimed.

Most cars bought in the UK are paid for through finance, whether new or used. The FCA was investigating whether some of them might have been unfair to consumers, but in a surprise announcement in September, the scope of the investigation was widened to mean almost all people who bought a vehicle on finance could be compensated.

Then in December, Stephen Braviner Roman, the FCA’s general counsel and chief executive in charge of legal affairs, suggested the scandal could be on a PPI level. “I think it would be premature to say that now it is definitely not about the scale of PPI,” he told MPs during a hearing of the Finance Ministry’s select committee.

The FCA is still investigating so details of exactly who should be compensated and how much have yet to be revealed. But in the meantime, if you paid for the vehicle with car financing before January 28, 2021, you should file a complaint.

In this article we explain:

For Times subscribers: Why you may have to wait a long time for car finance compensation

What is an FCA car finance investigation?

The FCA investigated the practices used by car dealers and lenders when it comes to arranging finance for new and used cars. The investigation was due to end in September 2024 but has been extended and the regulator will now report its findings in May 2025.

The FCA has also extended the time allowed for lenders to respond to complaints. For direct commission complaints (DCAs), which are banned in 2021, firms will have until December 4, 2025 to offer a final response to these complaints. For complaints about other aspects of car finance, companies may respond after that date.

So it will be a long wait before there is any resolution for complaining drivers – firstly because we have to wait until the FCA publishes the results of its investigation in May, and then perhaps until December for financial service providers to respond to the flood of complaints they have received .

The bottom line is that if you bought a vehicle on a finance account before 28 January 2021, when the discretionary commission ban came into force, you should make a complaint now. This will open the door to compensation when the FCA makes a decision on the matter.

You can learn more about how to file a complaint in this article.

Darren Richards, head of regulation and risk at insurance consultancy Broadstones, said the FCA’s extension illustrated the high complexity of the case.

“The regulator is given time and space to review these data, wait for legal reviews and reach the best conclusion,” he explained.

What is car finance and is it popular?

Car finance is incredibly popular in the UK. Almost 85% of cars on the road, new and used, were bought on finance. The most popular types of car finance are hire purchase (HP) and personal contract purchase (PCP) deals.

The major banks are the largest car loan issuers in the industry, with Barclays, Lloyds Bank and Santander being the three most popular lenders.

A hire purchase usually involves the buyer paying an upfront amount for the car. The balance is then paid in monthly installments with interest added. Buying on a personal contract usually involves smaller monthly payments, then a larger payment at the end of the loan term if the buyer wants to own the car outright.

If you’re in the market for a new car, our preferred partners Magnitude Finance offer finance plans from 8.9% APR, one of the cheapest on the market*. Use their online calculator to see how much your car could cost.

Why is the FCA launching an investigation?

Previously, car dealers could earn a commission on the car finance deals they sold. This often depended on the interest charged to consumers on car loans. This gave resellers an incentive to raise interest rates, meaning the customer got a more expensive loan.

The Financial Conduct Authority (FCA) banned this practice in January 2021 to make car finance fairer and more affordable.

The FOS says approximately 10,000 customers have complained they were overcharged for car finance deals they took out before the ban.

The FOS resolves disputes between consumers and companies and can decide when compensation must be awarded. He has already settled two complaints about the excessive cost of car finance in favor of customers.

These cases, along with a large number of complaints, prompted the FCA to launch an investigation into whether or not millions of car finance customers should pay compensation. If it decides a compensation scheme is necessary, those who sold car finance schemes before the 2021 ban may have to make substantial repayments.

Am I entitled to compensation?

It is still unclear exactly who will be eligible for compensation, according to Magnitude Finance, a specialist car finance broker.

The discretionary commission model worked in favor of some drivers as it allowed them to negotiate a much better deal.

The FCA investigates customer complaints about all of the following:

• You used car finance to finance the purchase of a vehicle before 28 January 2021, when the ban on discretionary commission arrangements came into force
• You used personal contract purchase or hire purchase to purchase a vehicle. These are the two most common forms of car financing
• The entity that sold you the car had a discretionary commission agreement. This is what allowed car dealers to earn a commission based on the interest rate set on the car finance loan

If you think the above applies to you and you may have been overcharged, it’s worth complaining to the car dealership or broker who sold you the vehicle as soon as possible.

However, companies cannot respond to complaints of this nature until 4 December 2025 at the earliest. This is due to an FCA investigation.

If you have already complained to a service provider and are not satisfied with the response, you can refer your complaint to the FOS.

You should normally make a complaint to the ombudsman within six months of receiving a final response from the firm, but the FCA extends this by a maximum of 15 months if you received this response between 12 July 2023 and 20 November 2023.

How much compensation will I receive if I mis-sold a car?

It is currently unknown how much affected consumers could receive in compensation and it is not yet certain whether the FCA will order the companies to pay compensation at all.

However, law firm Bott and Co says it has represented thousands of clients in wrongful car sales cases and in 90% of the cases it won on behalf of clients last year, the average payout was £1,500.

It’s worth noting that the range of these disputes extends beyond brokers raising interest rates to earn a commission. For example, in some cases customers said they were not well informed about what they were buying. Even so, the £1,500 figure gives some insight into how much claimants have received in the past.

* Representative example – personal contract purchase: cash price £15,000.00, deposit £500.00, loan £14,500.00 for 4 years at 8.9% representative APR (fixed). 47 monthly payments of £228.99 followed by a final payment of £7,560.00. Total loan cost of £3,832.53 and total payable amount of £18,832.53. Based on 8,000 miles per year, if exceeded, excess mileage will be charged. Finance subject to 18+ status only. We are a credit broker, not a lender. Magnitude Finance is the trading style of DSG Financial Services Ltd. DSG Financial Services Ltd is a company registered in England and Wales with company number 02313903. Our VAT number is 511678843. DSG Financial Services Ltd is authorized and regulated by the Financial Conduct Authority under company reference number 649675.