By TOBY WALNE, CHIEF MONEY REPORTER
Millions of motorists who took out car loans from dealerships are in line for compensation worth an average £700 - after the City watchdog on Tuesday said many were unfairly sold.
The Financial Conduct Authority (FCA) said lenders broke the law when consumers were not told about key information, such as paying hefty commission, when offering loans during the sale of a car.
If you took out a car loan from a dealership when buying a vehicle between 6 April 2007 and 1 November 2024 the answer could be 'yes'.
The regulator estimates there could be a payout in 44 per cent of cases. While the average payout is £700, the FCA says some will be due less, about £500, while others could pocket more than £2,000.
The majority of new cars and some second-hand ones bought via personal contract purchase (PCP) and hire purchase (HP) finance deals, where drivers pay an upfront deposit, borrow the rest from a lender and pay back the loan each month with interest, are included.
Payday: Millions of motorists who took out loans from dealerships when buying a car are in line for compensation worth an average of £700, according to the FCA
The FCA has found that 14.2 million motor finance agreements made were unfair. In more than 11 million cases, the compensation relates to motorists who were not told about a 'discretionary' commission awarded to salesmen for getting customers to pay high interest rates.
If you took out one of these so-called Discretionary Commission Agreements (DCAs), you may be due a payout.
You may also be due compensation if the loan involved paying high commission or there was a tie-up agreement between the lender and broker for offering loans.
Those who took out a discretionary loan deal can typically expect to receive £518, according to the regulator. However, you may receive more or less depending on the commission amount negotiated and when the loan was taken out.
The FCA believes loans where you were not told about big commission payments could lead to £960 compensation payments.
In other cases, such as tie-up deals between lenders and dealers, it may lead to £527 payouts. The regulator says for a relatively small number of loans – less than 14,000 – considered to be the most serious cases, typical compensation may be £2,400.
The regulator explains that it uses 'economic analysis' provided by 'independent statistical advice' to work out its figures to get the average payout calculation of £700.
Remember, you get compensation for each car loan, so for three eligible loans, offering an average £700 payout, you could receive £2,100.
The total cost of redress has been calculated at £8.2billion by the FCA. However, by adding the cost of running the scheme it totals £11billion.
Watchdog: The Financial Conduct Authority said lenders broke the law when consumers were not told about key information, such as hefty commission, when offering the loans
The regulator is proposing that lenders deemed to have paid discretionary commission will in most cases have to hand this back, along with interest.
In such cases it has 'proposed consumers are compensated the average of what we estimate they have overpaid, or lost, and the commission paid, plus interest'. It means the more commission you paid, the higher the repayment.
You also get compensated for how long ago the deal was struck, as this money could have been used elsewhere. The FCA proposes interest charges should be 'based on the annual average Bank of England base rate per year plus 1 per cent from the date of the overpayment to the date compensation is paid'.
The watchdog says that its calculations mean this typically works out at 2.09 per cent. Those who took out other finance deals where high commission amounts were paid or there was a tie-in between the lender and dealership might get extra money because the commission and the money lost was more.
How do I make a car finance claim?
The regulator has produced a 'template complaint letter' to give to your motor finance provider. This be found on the FCA website.
You must provide your name, date of birth, address when the agreement was taken out, date of agreement, vehicle registration plate number, when the vehicle was purchased, and the details of the dealership from which it was purchased.
The provider must respond explaining details of any commission arrangement. If it was a DCA, or commission accounted for at least 35 per cent of the cost of credit, or there was a contractual tie between lender and broker you could get compensation.
From the end of next year. According to the regulator the first payments will be 'later in 2026' and it is keen to 'draw a line under this issue quickly'.
Anyone who has complained before the compensation scheme goes live should be contacted by banks within three months of it starting. Around four million people have done so already.
Lenders will also be expected to track down those who are eligible and have not complained, within six months of the scheme starting.
Anyone who has not been contacted can also ask a lender to review their case up to a year into the scheme.
Motorists may opt out and go to court where they may receive more - or less - compensation, says the FCA. But it cautions against using claims management or law firms to seek payouts, since these can take a big cut of the money.
Lenders have already set aside billions to cover the cost of claims, with Lloyds Banking Group making a provision of £1.15 billion, Santander £295 million and Close Brothers £165 million.
