Around 90 per cent of new cars are bought this way, and many used vehicles are purchased on finance, too. However, the Financial Conduct Authority (FCA) – the regulator of this industry – has recently launched an investigation looking into how car finance may have been mis-sold to customers, similarly to how PPI was, and there’s the potential for thousands of pounds to be reclaimed.
Consumer champion Martin Lewis has now launched a campaign that aims to try and help customers reclaim any money from policies that might have been mis-sold. Within a day of Lewis’ car finance complaint tool being launched, he received 262,500 emails from disgruntled customers who believed they should be owed money
But how do you know if this has happened to you and what are the chances of getting compensation? Let’s take a look.
What sort of car finance is there?
There are three main types of car finance to be aware of, and which one you chose will affect whether you are likely to successfully claim.
Personal Contract Purchase – PCP
The most popular type of car finance with private buyers is Personal Contract Purchase, better known as PCP. It works by spreading the payments over a period of time. You’ll pay a deposit and then the agreed monthly figure until the contract runs out. At the end, you either hand the car back or pay an optional final payment (sometimes known as a balloon payment) to own the car.
Hire Purchase (HP)
Hire Purchase (HP) is where you spread the cost of the car over a specified period, but the difference is that you will own the car at the end of the agreement and when all finance has been paid.
Personal Contract Hire (PCH)
Personal Contract Hire, which is better known as leasing, is essentially where you rent a car for a set period. You’ll never own the car and there’s usually no option to buy the car at the end, either.
How has car finance been mis-sold and how do I know if I can claim?
The FCA has opened this latest investigation which is looking into the malpractice of Discretionary Commission Arrangements. This is where brokers and car dealers made up the interest rates on cars they were selling, charging more for the vehicles in the process and earning themselves more in commission in the process. But the crucial element is that you DIDN’T know this was happening.
The FCA banned these Discretionary Commission Arrangements on January 28, 2021, so you won't be able to claim if you took out any car finance agreement after this. But if you took out car finance before this – crucially it is only PCP and HP finance that it applies to, and NOT leasing – you may be able to claim. Whether the car finance agreement has come to an end or not is irrelevant. There is no fixed starting date from when you can claim, but according to Martin Lewis for agreements made after April 2007, you might be able to get money back.
Though not all car finance companies did this, Martin Lewis claims that there are more than 100 firms that did, including big names like Black Horse, and Barclays as well as the Financial Service divisions of large car makers like BMW and Mercedes.
If you think you have been mis-sold car finance because of this, Lewis is urging customers to make a complaint as soon as possible. This should be to the car finance company itself – the firm you paid the money to – rather than the broker or car dealer.
How likely is it that I will be entitled to compensation and how much am I likely to get?
While the FCA’s investigation is running, no money will be paid out until it has made its ruling. The FCA has set a deadline for September 25 this year, and this could be extended, but customers should make complaints now as the process of being able to claim may time out – as was the case with PPI.
According to FCA estimates, 40 per cent of car finance agreements had ‘discretionary commission arrangements’ added in this period, and it’s primarily only personal vehicle usage that it applies to and not businesses. If you had multiple car finance agreements in this period with this commission model, you may be entitled to multiple payouts.
Whether you successfully get compensation will ultimately come down to the FCA’s decision and whether your car finance did include these discretionary charges added. How much you're entitled to will come down to how much commission was added to your finance arrangement, and the cost of the car itself. The greater the amount financed, the more money you should get in compensation.
Martin Lewis estimates that the average figure customers should be entitled to around £1,100.
