Car finance: What's behind the mis-selling complaints?

Consumers who were mis-sold finance agreements when purchasing a car may have to wait months for a ruling on whether they should receive compensation. The ongoing dispute over hidden commission payments has been reignited due to a Court of Appeal ruling, potentially leading to billions of pounds in compensation for car buyers.

However, the Supreme Court has agreed to hear an appeal against this ruling. Simultaneously, the UK's Financial Conduct Authority (FCA) has also allowed car finance providers to extend the time they have to process complaints. This means the potential compensation process could be further prolonged.

Lawyers representing motorists say this could further delay compensation that should be paid to car purchasers who may not have been fully informed about and consented to commission payments. The vast majority of new cars and many used cars are purchased through finance agreements, with approximately two million cars sold this way each year, where customers pay an initial deposit followed by monthly payments that include interest.

In a complex and lengthy development, many of these agreements have come under scrutiny. In 2021, the FCA banned deals where dealers received commission from lenders based on the interest rate charged to the customer. The FCA stated that this incentivized dealers to charge buyers interest rates higher than necessary.

Last month, a Court of Appeal ruling broadened the scope of who could be eligible for compensation, potentially adding billions of pounds to lenders' final bill. The ruling argued that it was unlawful for lenders to pay dealers any commission without the buyer's informed consent. In other words, customers should be clearly told how much commission would be paid and agree to it, rather than having these details hidden within the loan's terms and conditions.

The FCA has stated that the ruling could result in a significant increase in new complaints to dealers and car finance providers and has urged people to make a claim if they believe they were a victim of mis-selling. The regulator has extended the time providers have to consider complaints to December 2025, aligning the deadline for firms to handle both discretionary and non-discretionary arrangement complaints. The FCA also hopes the Supreme Court will make a decision quickly when reconsidering the Court of Appeal ruling, in order to establish an orderly compensation system.