Car finance mis-selling investigation: what you need to know

Millions of UK drivers could land compensation as the finance watchdog investigates car finance mis-selling. 

The Financial Conduct Authority (FCA) says that some customers 'may have been charged too much' on car finance loans before January 2021. 

Car finance is a £40bn industry in the UK, with more than 90% of new cars bought on finance, according to The Car Expert. 

Here, Which? explains what you need to know about the issue and making a complaint if you think you have been affected.

What is the problem with car finance?

Before 28 January 2021, some car finance lenders had 'discretionary commission arrangements' with brokers. 

This meant that brokers were empowered to adjust customers' interest rates and they earned more commission when rates were higher.

This may have incentivised brokers to maximise interest rates to make more money. So if you bought a car on finance via a broker with one of these arrangements, there's a chance you were unfairly charged too much. 

The FCA outlawed this practice in January 2021, but a 'high number' of people have complained that they were overcharged before the ban. 

In January 2024, the FCA said it would 'examine the issue', using powers under the Financial Services and Markets Act 2000 to review historical motor finance commission arrangements and sales.

In an update in May, the Financial Ombudsman Service (FOS) said it had around 20,000 open complaints related to car finance commission. 

• Find out more: the bestselling cars of 2024

How to find out if you are affected by the issue

The FCA says you may be affected by the issue if:

• You bought a car under a finance scheme (such as hire purchase or personal contract purchase) before 28 January 2021.
• There was a discretionary commission arrangement between your lender and broker.

You might not already know if your broker and lender had a discretionary commission agreement, but they should be able to tell you if you contact them. 

You can use our template letter to help check if you have been affected and lodge a complaint (more on this below).

The investigation won't apply to you if you used car finance on or after 28 January 2021, or if you used a hire agreement such as personal contract hire.

• Find out more: have I been mis-sold a financial product?

Which firms are involved?

The FCA's investigation was sparked by a FOS decision against Barclays in January 2024. The FOS, which adjudicates complaints against financial institutions, ruled that the bank had unfairly paid commission to a credit broker. 

Barclays launched a judicial review against the decision, but this was dismissed in December 2024. The bank is appealing the decision.

Lloyds Banking Group has set aside £1.2bn to cover the potential costs of the FCA's review. It organises loans through its Black Horse finance arm, which is the UK's largest motor finance provider.

Analysts at RBC Capital Markets estimate the redress bill could come to £2.5bn for Lloyds, £1.1bn for Santander, £350m for Barclays and £250m for Close Brothers. 

How much compensation could I get?

Redress could cost the industry between £6bn and £16bn.

The FCA says that if it does find 'widespread misconduct' and consumers have lost out as a result, it will work out how to compensate people 'in an orderly, consistent and efficient way'. 

On 30 July 2024, it said the prospect of a consumer redress scheme was 'more likely' than when it first opened its investigation. 

In one FOS case that was resolved in favour of the consumer, the buyer was found to have been charged 5.5% when they could have gotten 2.49% without the broker's commission. 

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

In April, the FCA wrote to car finance firms to remind them that they must maintain adequate financial resources to meet the costs of resolving complaints. 

On 30 July, the FCA said it will set out the next steps of its investigation by May 2025. It said that if it can provide an update sooner, it will. 

Consumers win landmark mis-selling case

On 25 October 2024, the court of appeal ruled in favour of three borrowers filing complaints against FirstRand Bank and Close Brothers for potential car finance mis-selling.

The ruling determined that it was unlawful for car finance companies to have paid commissions to car dealers without the borrower's knowledge.

Both companies have said they intend to appeal the decision, which could potentially impact the FCA's ongoing investigation. 

How do I complain?

First, contact the firm that sold your car finance product. Wait for its final response and, if you're not satisfied, escalate your complaint to the FOS.

A final response from the business may take a while, though. The FCA has put a pause on the eight-week deadline for providers to get back to you while it carries out its investigation. 

In July 2024, the FCA extended this pause, so providers won't have to respond to your complaint about car finance until 4 December 2025. This applies to complaints about both discretionary and non-discretionary commission arrangements. 

However, you will get longer to refer your complaint to the FOS. Typically, you'd have six months to take your complaint to the FOS after getting your final response, but the FCA has extended this referral window to 15 months (or 29 July 2026, whichever is later) for these types of car finance complaints while it carries out its work. 

If your complaint is covered by these temporary complaint-handling rules, the business must tell you. Make sure you keep a record of any complaints you make, as this could be helpful in the future. 

Beware of claims management firms

Which? experts have already spotted paid social media ads from claims management firms encouraging potential mis-selling victims to enlist their services. 

One ad we've seen misleadingly suggests drivers could be owed compensation if they bought a car on finance 'in the last ten years'. In fact, only people who bought cars before January 2021 could be eligible.

If you use a claims management company, you'll give part of your payout to that firm if your claim is successful. To keep all the compensation for yourself, you'll need to file a complaint using the process outlined above.

• Find out more: scam car finance claims services on social media

What's the best way to buy a car?

Buying a car outright with cash just isn't an option for many consumers and that's why a range of car finance options have sprung up to fill the gap.

You can buy a car on hire purchase, which means paying monthly for a car directly from a lender. You'll own the car after your final monthly payment, but you'll usually be responsible for servicing and insurance costs throughout. Monthly payments tend to be high with hire purchase. 

Another option is personal contract purchase, which involves paying a deposit, and then monthly payments. After that, you can buy the car by paying another lump sum if you want to. But the final lump sum can be quite expensive. 

Finally, personal car leasing involves a deposit and monthly payments, just like personal contract purchase, but you won't have the option to buy the car at the end as you're effectively renting it. 

If none of these suit you, you could also use a personal loan or 0% credit card to buy a car. 

• Find out more: car finance explained – learn more about your options, and see our expert reviews of car finance providers.

Drive smarter and cut costs using our expert advice. Get our free monthly Cars newsletter

This story was first published on 16 January 2024. It was last updated on 28 February 2024.