Mis-sold PCP car finance? Find out how to claim compensation

If you bought a car on PCP or Hire Purchase before 28 Jan 2021 you could claim £1000s in compensation. Here's your complete guide.

  • Find out if you've been mis-sold PCP car finance
  • You could be due £1000s
  • We explain how to claim

The Financial Conduct Authority (FCA) has launched a major investigation into hidden, unfair car finance commission. So if you bought a vehicle on a PCP or HP before 2021 you could have been mis-sold car finance and as a result could be owed £1000s. 

We explain how to find out if you were mis-sold PCO car finance and how to claim money back. While there is currently a halt on dealing with new complaints, we'd still suggest getting your complaint in sooner so you're at the front of the queue.

In January 2021, the FCA banned what are know as discretionary commission arrangements (DCAs). This saw banks give brokers such as car dealers incentives to charge higher interest rates in return for higher levels of commission.

As brokers had the flexibility to vary the interest rate a customer pays, they could up the interest rate ‘at their discretion’, without having to tell the customer.

"If you took out a car loan before January 2021, you may be affected. The FCA investigation is looking into loans dating right back to 2007, meaning millions of motorists who bought a new car on PCP or HP car finance may be eligible for compensation."

In banning this practice of ‘hidden commission’, the FCA removed the incentive for brokers to increase the interest rate that a customer pays for their motor finance.

However, the practice had been in place for many years prior to this. As awareness of it increases – aided by claims management companies – so a growing number of complaints are being made.

While the majority of these have been rejected, many customers are escalating their complaints to the Financial Ombudsman Service.

It was the Financial Ombudsman’s recent decision to uphold two complaints, resulting in motorists each receiving around £1000 in compensation, that led the FCA to investigate.

Am I eligible for being mis-sold PCP car finance?  

If you took out a car loan before January 2021, you may be affected. The FCA investigation is looking into loans dating right back to 2007, meaning millions of motorists who bought a new car on PCP or HP car finance may be eligible for compensation.

However, those who leased a car, will not be eligible for compensation, because no discretionary commission arrangements would have been in place. Similarly, 0% finance deals are not affected – because no commission linked to a variable interest rate would have been paid.

How much can I claim?

Many agree that motorists could be entitled to £1000s of pounds in compensation if the FCA decides that action is necessary. Payouts could be based on the interest on loans, the commission, or the whole loan – all of which involve large sums.

"Two cases recently upheld saw Lloyds Banking Group repay the difference between the contracted interest rate and the cheapest rate it was offering at the time. On a £7619 car, this saw the customer receive £1147 in compensation."

Barclays Partner Finance was ordered to pay out £1327. In both cases, compensation was based on the extra interest motorists paid, not the entire cost of their car finance.

How to claim: step-by-step guide

Claims management firms are already urging motorists to take action. Following the FCA’s announcement of its investigation, efforts here have stepped up – you will probably have seen adverts and may even have received ‘cold calls’.

However, as the FCA has not yet decided if action is necessary, there is currently nothing yet in place to claim against.

The FCA has also put a freeze on firms handling complaints while it carries out its investigation, as a way of creating ‘breathing space’ while it looks into the issue.

"Logging a complaint is free, straightforward and there is no need to go through a claims management company – particularly as they will take a proportion of any compensation that may be awarded, unnecessarily reducing the amount a car owner would receive."

So what should you do? We're advising those who have been affected to still approach their lender and log a complaint.

This will help those who have been mis-sold car finance be at the head of the queue should the FCA decide action is necessary.

Who do I complain to?

While it may be a car dealer who acted as broker for any finance deals, it is the lender who will be responsible if the FCA decides compensation is necessary.

Car finance lenders include Lloyds Banking Group, whose divisions include Black Horse, Barclays Partner Finance, and others.

They are legally deemed responsible for the actions of a car dealer or credit broker under the 1974 Consumer Credit Act. What’s more, the lender would have devised the commission structure for its products, not the car dealer.

Therefore, don’t be surprised if your car dealer advises you to contact the firm who sold you the car finance instead.

Do I need to use a complaints management company?

You do not need to use a complaints management company (also known as a CMC) to make a complaint. In fact, we'd advise against it. You can log a complaint with the company that issued the car loan yourself – and this will mean you keep every penny of the compensation that may be awarded.

What will happen next?

If the FCA decides there has been widespread unfair treatment of car finance customers, it could implement a simplified ‘mass claims’ process. Such a scheme to compensate people could be similar to the system used for PPI claims.

It would mean anyone who was affected being able to claim compensation, if they can prove they were impacted.

However, it could also simply issue more guidance to car finance firms, to help them deal with complaints more efficiently and consistently.

Is there a deadline for complaints?

While there is no rush to make a complaint, as the FCA investigation will not be complete until September 2024, we would still advise doing it sooner rather than later. If you have already complained, any response will be delayed.

"For complaints received before 17 November 2023, and for complaints made until 25 September 2024, the FCA says that it has paused the eight-week time limit for sending a final response to complainants. This will allow it to complete its investigations."

"Until now, most consumers will not be aware of these discretionary commission models and the law allows them three years from the point they became aware to make their complaint," says the FCA.

Customers also now have 15 months to refer complaints to the Financial Ombudsman, rather than the usual six months.

What is a discretionary commission agreement?

A discretionary commission arrangement, or DCA, allowed car finance brokers, such as car dealers, to adjust customers’ interest rates on PCP and HP loans, rather than simply being given a single fixed interest rate by the finance company.

They earned more commission if interest rates were higher. This incentivised breakers to maximise interest rates to make more money.

The FCA previously said that 36% of car finance loans taken out between 2013 and 2016 had discretionary commission. Its executive director of consumers and competition Sheldon Mills recently revealed that three-quarters of loan agreements between 2007 and 2021 would have had some form of discretionary commission model.

How many people have been mis-sold PCP car finance?

In announcing its investigation, the FCA said there has been a high number of complaints from customers to motor finance firms claiming compensation for commission arrangements prior to the DCA ban in January 2021.

"The Financial Ombudsman Service has considered some complaints rejected by firms," said the FCA. "It found in favour of complainants in two recent decisions."

It is understood that more than 16,000 complaints were received between October 2022 and September 2023.

Because these two complaints were upheld, the FCA said there was likely to be a significant increase in complaints from consumers to firms and the Financial Ombudsman’

Complaints have also been upheld in County Courts, all of which points to ‘significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements’.

How much could it cost the car finance industry?

Given the scale of car finance - more than 90% of new cars are bought on finance - this could see a payout for millions of motorists on a PPI-type scale. That was a £40 billion scandal and while this won’t see quite so much paid out, the figure could still be in the billions.

Royal Bank of Canada estimates a possible liability of between £2 billion and £8 billion. Shore Capital analyst Gary Greenwood forecasts a £5.5 billion cost. Analysts at investment bank Numis have said the compensation bill could hit £10 billion. Investment bank RBC has actually upped its forecast cost in recent weeks, from £8 billion to £16 billion.  

Bank of England deputy governor Sam Woods has warned the inquiry could have "significant financial ramifications" for lenders.

The language used by the FCA in announcing the investigation is surprisingly robust. It stated:

"If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way."