Financial expert Martin Lewis has advised on the next steps for drivers who were mis-sold car loans, after a financial regulator said the industry could pay out up to £18bn in compensation.
The Financial Conduct Authority is launching a compensation consultation which will determine how much is paid out to millions of people who paid more interest than they knew about.
A Supreme Court ruling on Friday (1 August) found that lenders are not liable for hidden commission payments in car finance schemes, a decision which means most of the claims will not go ahead, but only the most serious claims will be eligible for compensation.
But many cases in a separate strand of the car finance mis-selling case, which was not part of the Supreme Court ruling, are still likely to receive payouts, Mr Lewis explained.
Am I eligible for the compensation scheme?
Mr Lewis explains that there are “two strands” of the car finance mis-selling case. Discretionary Commission Arrangements (DCAs), which Mr Lewis says will be the main form of compensation to come out of the consultation, were not involved in the Supreme Court case, he said.
“The one most people have complained about wasn’t involved in the Supreme Court decision, although it was on hold just in case anything in that decision caused a wobbler for DCAs,” Mr Lewis added.
DCAs were banned in January 2021, so anyone with a personal contract purchase (PCP) or Hire Purchase (HP) deals before then, is likely to have unknowingly agreed to one.
“It is when you went to a car broker or dealer and it increased the amount of interest that you were charged to increase the amount of commission without telling you,” Mr Lewis explained.
Those who had PCP or HP deals are “likely to get compensation under this scheme”.
But Mr Lewis notes that those who had 0 per cent interest, or whose commission was very small, are unlikely to receive compensation. But he says that for most people, the compensation will be in the hundreds of pounds.
The other strand of the mis-selling case is the one element of the Supreme Court case which was upheld by the court – with the other two being dismissed.
This refers to commissions which were “manifestly unfair”, Mr Lewis explained, adding that it is harder to define because it was done on a case-by-case basis. Factors in the payout may even include how vulnerable you are – and whether it is therefore seen as more unfair for the commission to have been so high.
As this is done case-by-case and it is not a blanket issue like the DCA cases, it is unclear how the compensation scheme will work for these, Mr Lewis said.
What should I do next?
For those that are unsure whether they are eligible, Mr Lewis advises putting in a complaint to see whether you had a DCA.
“If you’re one of those people who have already had a letter saying that your car finance firm, after you complained, won’t deal with it until December this year, that will almost certainly be delayed until next year,” he said.
The FCA is advising consumers who believe they may have paid too much should complain now, and advise against using Claims Management Firms (CMC) or law firms, which could cost up to 30 per cent of any compensation fees received.
Lenders will have to contact customers, and either automatically pay out consumers or consumers will have to opt into a scheme for compensation, meaning receiving compensation will be “very simple to do”, Mr Lewis explained. Therefore, CMCs and law firms could take 30 per cent of the compensation without doing any work.
Mr Lewis’ money advice website MoneySavingExpert offers a free tool which will do a template complaint for you for DCAs.
How much could I be compensated?
The FCA estimates that most individuals making claims will receive “less than £950 in compensation per agreement”.
The final cost of a compensation scheme will depend on the final design which it takes, the FCA added in its statement earlier today. The first payments are forecast to be made in 2026.
For DCA cases, the maximum you could receive is all of the commission you paid, Mr Lewis said. It is more likely you will be paid the higher interest rate you were charged minus the standard interest rate.
A simple interest – meaning the interest is calculated on the original amount of the loan – of roughly 3 per cent per year will be added on top of the payout, Mr Lewis added.
“The very high likelihood is that many people who had a discretionary commission arrangement where they were charged more interest than they should have been will get back a chunk of that in the hundreds of pounds at some point in 2026,” he said.
But the expert warned that the industry could “fight this hard”, before he urged industry members to accept the “fair compromise”.
