Complexity could delay payouts in car finance compensation scheme

Car buyers and banks are bracing themselves for the outcome of a review into a multi-billion-pound scheme designed to compensate borrowers who paid too much commission for car loans. 

However, critics say the scheme may be overly broad and complex, potentially delaying claim resolutions for years. 

It follows a year-long battle between lenders, legislators and even the government over three cases centred around salespeople being incentivised to charge higher interest rates –  without the knowledge of buyers – so they could bank an increased commission. 

This ended at the start of this month with a landmark ruling at the Supreme Court. Lord Robert Reed ruled that in two of the cases such arrangements – known as discretionary commission arrangements (DCA) – were legal, but he judged that in the the third, known as the Johnson case, the value of the commission (over half the sale price) and how it was disclosed pointed to an unfair relationship between banks and car dealers, making it illegal under the Consumer Credit Act. 

In the wake of the judgements, finance watchdog the FCA announced it will consult the finance industry on a scheme to compensate car buyers who paid excessive commission charges on car loans going back as far as 2007.

The pot for those affected is set to be between £9bn and £18bn. While incredibly high, it is more than half the forecasted £44bn and leaves lenders – especially the likes of Black Horse – celebrating the rulings. 

During the review, which is set to be published in October, the FCA says it will examine how lenders should assess claims and what compensation may be due.

There are concerns, however, that the process risks being held up by the complex natures of the cases as well as contradictory views held by the FCA and the courts. 

For example, the FCA deemed it was the nondisclosure of particular features within lending agreements, rather than the features themselves, that were deemed unfair, while the Supreme Court ruled that nondisclosure or partial disclosure of a commission paid by a finance company to a dealer was not. 

Faced with these partially opposing statements, the FCA’s task will be to weigh up a range of factors and decide what it considers to be unfair. These will include the ‘characteristics’ of the consumer – a term it has yet to define but which relates to the Court’s comment regarding their ‘sophistication’ – whether the loan complied with regulatory rules and the extent and manner of a commission’s disclosure.