Car finance mis-selling – what do you need to do?
Millions of drivers could be in line for payouts through the misselling of car finance. We explain what you need to do – and how much you could receive...
Up to nine in 10 new cars in the UK, along with a significant amount of used models, are purchased using some kind of car finance. The appeal is clear, because it allows drivers to spread the upfront purchase cost, rather than paying a single large sum in cash.
However, while financing is often seen as a more manageable way to get behind the wheel of a new or used car, millions of drivers who entered an agreement before 2021 paid more than they needed to, due to commissions paid by the finance lender to the car dealer which were hidden in the contracts.
While the practice has since been banned, it has resulted in what’s often called the car finance mis-selling scandal, with tens of thousands of victims registering complaints in the hope that they could be given compensation.
Here, we share exactly what the car finance scandal is, explain its potential impact on the lending companies and drivers who paid too much in interest and share why you, the motorist, need to know about it.
What is the car finance mis-selling scandal?
The car finance scandal first came to light in January 2021, when the Financial Conduct Authority (FCA) banned discretionary commission arrangements (DCAs) – a practice in which dealers earned a higher commission from the lender by increasing the interest rates the customer had to pay. This was done without the knowledge of the customer, although some complained to the FCA about being overcharged before the practice was banned.
It’s estimated that 40% of personal contract purchase (PCP) and hire purchase deals that took place between 2007 and 2021 featured a DCA. In January 2024, the FCA announced a review into historic cases of DCAs within car finance deals, with financing firms requested to pause any complaints until December 2025. In the first five months of the investigation, the FCA received around 20,000 open complaints from drivers.
In October 2024, the Court of Appeal heard a case concerning three drivers who each entered a finance agreement without knowing they contained a DCA – giving each dealer a commission of 25%. The court ruled that it was unlawful for dealers to receive commission from finance firms without the knowledge of the customer.
Following the ruling, FirstRand Bank (a South African company that provides car finance in the UK under the name MotoNovo) and Close Brothers – the lenders involved in the test cases – appealed against the decision, with the case being brought to the Supreme Court. This latest case was held to decide whether the Court of Appeal’s ruling should be upheld or overturned.
What did the Supreme Court rule?
Announced after trading hours to avoid instability within the car retail industry, the Supreme Court partially overruled the Court of Appeal’s decision, meaning dealers who accepted commissions from lenders without the knowledge of customers were not acting unlawfully so long as the amount is not considered exceptionally high.
Lord Reed ruled that the Court of Appeal’s decision was incorrect on many grounds, focusing on the idea that the finance companies bribed dealers with commissions. While Supreme Court judges acknowledged that car dealers must act fairly towards their customers, they highlighted that they don’t owe loyalty to clients.
Nevertheless, out of the three instances covered in the case, one was upheld. This was because one finance contract, entered by Marcus Johnson from Cwmbran, Torfaen, featured a commission that was worth 55% of the overall loan. Supreme Court judges ruled that the relationship the dealer had between Johnson and the lender, FirstRand Bank, was unfair – awarding Johnson the amount of commission with interest. This opens up the possibility that some drivers who entered a finance agreement that featured a DCA might still be able to get compensation.
Since the ruling, the Treasury has announced that it will work with regulators and the car retail industry to ‘understand the impact’ of the Supreme Court’s decision – making reforms to the Consumer Credit Act and Financial Ombudsman Service to improve clarity in future finance agreements.
How much compensation could drivers receive?
Despite the Supreme Court’s decision, there could still be a smaller payout for those affected who entered a finance agreement with an exceptionally high commission.
In December 2024, the FCA announced it was considering a redress scheme which will require lenders to provide compensation without affected customers having to make an individual complaint. The scheme is expected to cost lenders between £9bn and £18bn.
Anticipating that the Supreme Court might uphold the Court of Appeal’s ruling, a number of lenders put aside money to be used as compensation. This includes Lloyds Banking Group, which operates Black Horse Finance, which set aside £1.2bn.
Following the ruling, the FCA announced that it will begin a consultation focusing on who is eligible for the redress scheme, with the possibility that millions of drivers will be included. Nevertheless, the organisation stated that it’s ‘hard to estimate’ how much victims will receive from the redress scheme. Some have speculated that the figure could be less than £950 per finance deal they entered.
The FCA anticipates more information about the redress scheme, including who qualifies and how much they should be able to receive, in early 2026.
What should victims do now?
If you’ve already registered a complaint, the FCA states that you don’t need to do anything. However, if you believe you entered a finance deal between 2007 and 2021 that featured a DCA, you should email a letter of complaint to the finance lender (not the dealer).
This should include:
- Your full name
- Your date of birth
- Your address – including the address you lived at when you financed the car if you’ve moved
- The car’s registration number
- The finance agreement policy number – this will be featured on all documents related to the agreement
- When you began financing the car
- The dealer you used to finance the car
If you can’t find the finance agreement policy number, ask the lender to use the other details you’ve provided to find any agreements that were made in your name.
The lender’s response, which may take more than a month to receive, should confirm whether the finance agreement you entered featured a DCA. If it did, your complaint should have been logged and you don’t need to do anything else.
If the reply states that your financing agreement didn’t feature a DCA, it’s worth checking if any other forms of commission were included. If so, you might still be able to make a commission disclosure complaint; however, you’ll need to wait for more details from the FCA about their upcoming redress scheme.
Should I use a claims management company
The FCA has urged drivers not to use claims management companies or legal firms when making a complaint, which will likely take up to 30% of any compensation they receive. Instead, if you’d like more advice, you can contact the Financial Ombudsman or wait for further details from the FCA, who are currently saying lenders will be obliged to contact anyone eligible for compensation.
