THE Financial Conduct Authority (FCA) has announced an investigation into the car finance industry and a potential compensation scheme.
Millions of Brits may have been missold certain financial services in what experts like Martin Lewis suggest could potentially rival the PPI scandal.
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But what prompted the probe and how can you claim? Here's everything you need to know.
Why are the FCA investigating?
The FCA announced in January 2024 that it would be probing car finance deals arranged over the last several decades for potential overcharging.
During that time, some lenders allowed brokers who arranged car finance loans to freely increase the interest rate they offered customers on the loan.
This was due to something called a discretionary commission arrangement, where brokers were paid a percentage of the interest on the loan in return for selling it.
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As such, the higher the interest rate on the loan, the more the broker would be paid, incentivising them to increase interest rates beyond what the market dictated.
This was banned by the FCA in 2021, but a surge of complaints relating to loans from before then were rejected by lenders or brokers, who claim they acted fairly and legally at the time.
Outrage from drivers has now prompted the watchdog to look into these finance arrangements to see if customers were overcharged.
What is the cutoff date for applications?
You can still lodge a complaint with your finance provider but you must meet two criteria for it to be considered.
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First, you must be complaining in relation to a finance deal on a motor vehicle (including cars, vans, motorbikes and motorhomes) that was agreed before January 28 2021.
Secondly, you must have bought the vehicle through agreements like Personal Contract Purchase (PCP) or Hire Purchase (HP), which make up the majority of finance deals and mean you own the vehicle at the end of the agreement.
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You are not eligible to claim if you leased the motor through a hire agreement, like Personal Contract Hire, where you did not take ownership of it at the end of the term.
New complaints can still be submitted, but the FCA has suspended the requirement for providers to decide your complaint within eight weeks.
All fresh claims will now be responded to after the regulator concludes its investigation on September 25.
You should still submit your complaint as soon as possible to make sure it is processed in good time.
However, if you have already had a response to your complaint and you are not satisfied, the FCA is extending the time you have to appeal to the independent Financial Ombudsman.
If you were given a final response between July 12 2023 and November 20 2024, you have up to 15 months to appeal rather than the usual six.
This makes the final cutoff date for appeals of existing complaints February 19 2026.
What have the experts said?
Some prominent financial experts believe that there is a case to answer over the possible mis-selling of car finance.
On his ITV show, personal finance guru Martin Lewis said: "In my view, this is likely to be the UK's second biggest reclaim after PPI.
"Some estimate firms may be liable to repay up to £13 billion."
He suggested that discretionary commission may have affected up to 40% of all finance deals.
And statistics from the FCA suggest that the average buyer paid £1,100 more than they should on a £10,000 four-year deal.
What was the PPI scandal?
Payment Protection Insurance (PPI) is a financial product that was sold alongside loans, credit cards and mortgages as a method of insuring your repayments.
For example, if you took out a loan but then fell ill and were unable to work, you could make a claim on your PPI policy to avoid defaulting.
However, banks and financial institutions were found to have mis-sold PPI to their customers.
This included policies being sold to people who didn't agree to take them out and applicants being told they would be refused lines of credit if they didn't buy a PPI policy.
According to the FCA, since the scandal broke in 2011, a total of £38.3 billion had been paid out as of 2019.
And a new PPI storm could be brewing as a class action lawsuit filed in October 2023 saw major banks accused of adding discretionary commission to PPI in a similar way to the alleged mis-selling of car finance.
All PPI claims originally had to be submitted by 2019, but the new suit led by law firm Harcus Parker is open to anyone who had a claim rejected or who only had part of their money paid back.
Damon Parker, senior partner at Harcus Parker, said: "This group action is intended to force financial institutions which profited from PPI to pay backmoneythat they should have never taken in the first place.
"The banks and credit card companies have known for years that they should pay this PPI secret commission money and have been using every trick in the book to avoid paying."
How can I make a complaint?
If you believe you may have been affected by a discretionary commission agreement, you should make a complaint directly to the provider of your loan.
This is often, but not always, the financial services arm of the dealership that sold you your vehicle.
Martin Lewis' Money Saving Expert site provides a free tool to help drivers draft a complaint.
All you need to do is enter the details of your deal and its provider and send it to the email address provided.
You can pursue a claim independently or you can employ a claims management firm to do it for you, though you will be charged for their services.
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Your claim will then be assessed after September 25.
If you are dissatisfied with the response, you can appeal to the Financial Ombudsman via its website - just search 'Financial Ombudsman how to complain'.
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