Up to seven million people could be waiting for compensation worth thousands of pounds after regularly being wrongly sold expensive car loans by dealers since 2014.
The emerging scandal – dubbed ‘PPI on wheels’ after the collapse of payment protection insurance in the late 1990s and early 2000s – could leave banks providing the loans with a bill of £13bn sterling.
Experts such as Martin Lewis are advising anyone who thinks they may be affected to submit a complaint now to ensure it is treated fairly.
Although this represents only a fraction of the PPI’s £50 billion in fraudulent payments, the sheer scale of the bill will once again raise serious questions about the banking sector’s poor treatment of customers, which it whether savers, small businesses or retirees.
It also shows the city regulator in a bad light. With the Financial Conduct Authority (FCA) now paving the way for compensation by launching an investigation into car loan mis-selling, some believe it has let customers down.
PPI on wheels: Up to seven million people could have been wrongly sold expensive car loans by dealers since 2014
This focused on drivers who purchased a new car using loan finance – either a Personal Contract Purchase Plan (PCP) or a Hire Purchase (HP) agreement.
Around nine out of ten new cars are purchased this way. According to data analyst Statista, some 18.2 million new cars were registered in the UK between 2014 and 2021, and 16.4 million could have been purchased using a PCP or HP .
During this period, Martin Lewis claims that up to 40 per cent of these motorists – or around 6.6 million – may have unwittingly signed a ‘discretionary commission agreement’ (DCA). In doing so, many paid higher loan interest than they should have.
In effect, banks allowed dealers to earn large commissions on the loans they recommended. These costs were then passed on to customers via higher interest rates.
The FCA claims a car buyer borrowing £10,000 over four years could have paid up to £1,100 more than they should have due to commissions paid to dealers by banks.
It is estimated that motorists would have paid £165 million a year in unnecessary costs.
Investment bank Jefferies put the cost of repairing the financial damage at £13 billion.
This compares to the £50 billion it took banks to unravel the PPI scandal, in which people were sold poor value or useless cover to meet their mortgage, loan repayments or credit card if they could not work due to illness or unemployment.
The FCA launched its investigation into DCA mis-selling after the Financial Ombudsman Service (FOS) said it had received 17,000 complaints from motorists.
The regulator is expected to announce its findings in September, by which time it is likely that a formal redress system will be put in place to make it easier for victims.
Tellingly, Lloyds Banking Group, whose car lending arm is Black Horse, said last month it would set aside £450 million to respond to possible claims.
Yet experts estimate Lloyds could face a total compensation bill of more than £2 billion. Other major lenders – including Barclays, Close Brothers and Santander – face similar bills.
Close Brothers last month suspended its dividend payments to shareholders due to concerns over the size of the compensation bill it could face – and is setting aside a £400m capital cushion as a reserve .
Debt adviser Sara Williams, who runs the consumer website Debt Camel, says: “Most people thought, when they took out a car loan, that the interest charged was just to finance the transaction. They did not know that some fees would be deducted as sales commissions.
“Few people would have known that the details of these commission payments were buried in the fine print.”
She adds: “The manner in which the financing was sold left borrowers vulnerable to deception. After viewing a car and agreeing on any extras – for example, alloy wheels and color – the buyer would then be offered a loan based on how much they could afford, rather than what suited them the best. Often, the more they could afford, the more expensive their loan became.
Fears of mis-selling: Some 18.2 million new cars were registered in the UK between 2014 and 2021 – and 16.4 million could have been bought using a PCP or HP.
Experts estimate that interest charges on car loans of 4 per cent or less, at a time when the Bank of England’s base rate was 1 per cent or less – from 2009 – could be judged acceptable by the regulator. Those who paid more were likely considered exploited.
Anyone who is unsure whether they paid too much for car financing is encouraged to contact the dealership they obtained it from. They are required to confirm whether the loan was set up using a DCA.
Websites such as Debt Camel and consumer advocacy group Consumer Voice offer template letters that can be used to ensure the dealership provides the correct information.
Alex Neill, co-founder of Consumer Voice, said: “This mis-selling scandal could be huge – and it’s right that it’s being dubbed ‘PPI on wheels’.
She believes that the regulator will want to avoid a repeat of the long PPI crisis. It is therefore likely that this will result in a simple repair system.
The FOS recently ruled in favor of two motorists who had taken out car loans from Barclays and Black Horse, where DCAs had been agreed with the dealers.
The regulator responded by launching its investigation. It has now told car finance lenders that they should not resolve DCA complaints until its findings are published.
And Ms Neill is warning consumers to avoid “chasing ambulance” lawyers looking to make money from the crisis.
Martin Lewis says you should start by asking your dealer if they had a discretionary commission arrangement when you bought the car, using the template letter at money savingexpert.com/reclaim/reclaim-car-finance/#free -tool.
This can then be sent to the company, along with a timed complaint included in the application. You will need details such as the name of the company that provided the finance agreement, policy number (if available), your name, date of birth and address, including if it was different at the time. of the conclusion of the transaction.
You may not get an immediate response, although most companies must acknowledge receipt of the request within 28 days. If it says you had a DCA, then you could queue for a payment – but you’ll have to wait until September for more details.
Yesterday the FCA told Money Mail: “Discretionary commission arrangements have incentivized brokers (dealers) to increase the amount people are charged for their car loan. Customer complaints are numerous.
“Lenders and brokers reject most of these complaints. We are assessing the scale of the problem to ensure that if people need to be compensated, it can be done in the best possible way.
Adrian Dally, of the Finance and Leasing Association, said: “Discretionary commission arrangements do not automatically mean customers lose out. In practice, having the discretion to change interest rates often meant that dealers lowered them to be more competitive.
Lloyds said: “The £450 million (that we have set aside) is for the car finance commission. These include operational and legal expenses, as well as potential repairs. Significant uncertainty remains about the extent of potential repairs, if any, and their timing. We welcome the intervention of the FCA.
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