The financial watchdog has announced that it is investigating the car loans market to see if commission payments to brokers were too high. If the Financial Conduct Authority (FCA) finds against the brokers, it could trigger payouts to potentially millions of car buyers.
What car finance is the FCA looking at?
The loans in question were taken out by people buying new and secondhand cars, probably in the form of hire purchase plans or personal contract purchase (PCP) plans – both of which involve making repayments over a long period.
In recent years PCPs have been used by about eight in 10 new car buyers. They are also offered by big secondhand dealers, including those online.
When a car buyer uses a PCP they pay a deposit and take out a loan for a set period – maybe three or four years. The loan is for the full price of the car.
During that time they make monthly repayments, but not for the full amount they have borrowed - instead only to cover how much the value is expected to depreciate during the loan period. At the end of the loan period they are given the option of making a final, “balloon”, payment to own the car, or handing it back and starting a new plan.
So if, for example, the new car is advertised at £20,000 and the dealer judges it will be worth £12,000 after three years and the buyer pays a deposit of £2,000, they will take a loan for £18,000 but only make repayments for the £6,000 depreciation over the three-year period.
The FCA is looking at finance plans used to buy a car before 28 January 2021.
Personal contract hire (PCH) plans are not affected.
What are the FCA’s concerns?
Overcharging, essentially.
People buying a car through a plan would typically use an intermediary – for example, the dealer – to arrange the finance. Before January 2021 some of the lenders providing the finance used to allow these middlemen, referred to as brokers, to adjust the interest rates they charged customers.
Some brokers had “discretionary commission arrangements”, which meant they were paid more if the interest rate was higher, and so they had an incentive to make the loan more expensive for the customer.
What has prompted the investigation?
Customers who took out loans before 2021 have been complaining to lenders and brokers, encouraged by claims management firms. Most have been turned away. About 10,000 have taken their complaints to the Financial Ombudsman Service, the organisation that settles disputes between financial firms and consumers.
It has decided on two cases, and in both found that the way the commission arrangement between the lender and the car dealer worked was unfair to the consumer.
The FCA is clearly concerned that these are not isolated incidents.
How much has been overpaid?
It will vary from case to case as it seems some lenders gave brokers a wide choice of interest rates to apply.
In one of the ombudsman cases, the buyer was found to have been charged an interest rate of 5.5% when she would have paid 2.9% without the broker’s commission. In the second, the driver paid 4.67% when without commission the rate was 2.68%.
To give you an idea, on a £5,000 loan arranged over three years the difference in cost between rates of 2.9% and 5.5% is about £200.
Will I get a refund?
Not if you bought your car on or after 28 January 2021.
Otherwise you might. The FCA says that if it does find “widespread misconduct” and that consumers have lost out it will work out how to compensate people – it could be that it orders a return of whatever extra interest is calculated to have been paid over the loan period.
That is some way off at the moment. In the meantime, you do not need to do anything – in fact, complaints have been paused so nothing will be done until the end of the process.
A claims management company has called. Shall I use it?
No. You will have to pay a fee if you use a company to make your claim – it typically comes out of the payout.
If you haven’t made a complaint about this issue previously, you could wait to see what happens to the FCA investigation. If it finds bad practice it may order brokers to proactively contact customers who were affected to arrange compensation.
But it could tell them to reimburse the customers who have complained – and there is a time limit on complaints. Generally, you need to complain to your provider within six years of a problem happening or within three years of you becoming aware that you had cause to complain. If you think you could be running out of time, you should consider complaining to your provider now.
For anyone who has complained to a lender or broker and had that dismissed between 12 July 2023 and 10 January 2024, the FCA has extended the period in which you can take your complaint to the Financial Ombudsman from six to 15 months.
• This article was amended on 12 January 2024. An earlier version said that a PCP loan is not for the price of the car, but for how much it will depreciate during the period. This is not correct. The loan is for the full price of the car. Repayments, however, are calculated based on the depreciation.
