Motorists who have taken out a loan from a car dealership to buy a vehicle should contact it now – as millions could be in line for a payout worth an average of £1,100.
A landmark court ruling late last month found that anyone who took out a car loan for a new or second-hand vehicle can claim back any commission paid to the salesman if they had not been made aware of the arrangement.
As many as seven million motorists could be part of a windfall worth an estimated £13 billion as a result of the massive scandal engulfing the car sales industry.
Dodgy dealers: A court has ruled anyone who took a car loan for a vehicle can claim back any commission paid to the salesman if they had not been made aware of the arrangement
You could be eligible if you took out a car loan any time in the past 17 years, experts say.
However, you will need to register your details with the dealership where you took out the loan and bought your car. You will not get anything unless you register.
Here, Money Mail sets out exactly what you need to do to be in line for a payout – and how this furore arose.
Am I eligible for compensation?
Most buyers of new cars often use financing deals, which are generally arranged through the car dealership.
The industry regulator has been concerned for some time that buyers were being charged commission payments for the loan that they were not fully aware of.
But the new Court of Appeal ruling massively increases the scope of potential mis-selling claims.
It states that even if details of the commission were stated in your paperwork but were buried in the small print, the lender must still return the extra bonus paid to the dealership – as it was effectively ‘hidden’ from view.
Before this court ruling, it was thought that the mis-selling scandal would relate only to so-called ‘discretionary commission arrangements’ (DCA).
This was a specific arrangement with some loans where the salesman was able to decide how much to charge each customer in commission.
In a further blow to the car industry, the law courts have widened the net to include all personal contract purchase (PCP) loans and hire purchase (HP) agreements where any commission was paid by the customer.
These financing deals are used by nine out of ten buyers of new cars. Claims could stretch back to sales made from 2007.
How do the loans work?
A PCP allows you to buy a car without paying upfront.
Borrowers make monthly payments and at the end of the contract can opt to make a final payment to own the car or to start a new PCP deal for a brand-new model.
Hire Purchase (HP) is a credit agreement where you become the owner of a car after monthly payments and paying a final ‘option to purchase’ fee.
Options: A PCP allows you to buy a car without paying upfront. Borrowers make monthly payments and can opt to make a final payment to own the car or to start a new deal
How can I claim?
First you must register your details with the dealership where you took out a loan and bought your car.
This is the most important step because even if it fails to respond, the dealership now has your details. You will not get a payout unless you register.
Contact the dealership by letter. Send it by registered post and keep the receipt so you have proof you sent it, as it is vital to keep a paper trail in case details are disputed later.
At this stage, you should also ask the dealership if there were any commission arrangements included when you bought the car.
The dealership has eight weeks to reply in writing. You must keep a copy of the letter you sent as evidence.
Your correspondence must be dated and include details of the loan company used through the dealership. It must contain the loan policy number, as well as your name, address and date of birth, plus information about the vehicle and the purchase price.
You need to act now rather than wait, to ensure you are in control. Otherwise the dealership might later try to get you to accept a less attractive offer.
If the dealership fails to get back to you within eight weeks, escalate your case to the Financial Ombudsman Service. The ombudsman is already overrun with more than 20,000 such complaints.
Unfortunately, details of any redress scheme are not expected for another year.
Although most cases refer to new cars, if you purchased any vehicle, such as a motorbike or van bought for personal usage, these are included in the scope of claims. People who bought second-hand cars may also be affected.
Industry watchdog the Financial Conduct Authority (FCA) has been looking into this scandal since the start of 2021.
However, findings will not be ready until May next year, with December 2025 the earliest expected for a final decision – after which payments could be made to customers.
Can I do this myself?
This will be a long process and there are a number of solicitors who are offering to oversee claims on behalf of motorists.
However, they will typically take 25 per cent of any compensation. Overseeing your own claim should be straightforward and costs nothing.
Also, paying for a solicitor will not guarantee that the process is resolved any faster.
What if my claim has already been rejected?
Originally the FCA said payouts to customers were only to cover DCAs sold up to 2021.
Now the courts say any ‘fixed commission’ agreement paid to the salesman could also be included – which takes into account sales made in 2024.
Importantly, any customer who has already contacted a dealer to ask if a DCA was made should ask again now that any type of commission arrangement is under the mis-selling scope.
Payouts: As many as seven million motorists could be part of a windfall worth an estimated £13bn as a result of the loan scandal
Sara Williams, a debt adviser at consumer website Debt Camel, says: ‘Everyone who has taken a loan from a dealership – including those who have already been told, “No, your commission was not discretionary” – should contact their dealership.
‘We are currently in a state of limbo while the industry and regulators work out what to do. Now is the time potential claimants should act.’
Ms Williams says the loans were often presented at the time of sale just when the motorist was at their most vulnerable – with the salesman focusing on extras, such as alloy wheels and colour schemes, rather than getting the customers to read through the terms and conditions.
‘It means a huge number will be totally unaware that the salesman may have creamed off commission on loans,’ she added.
Who isn’t eligible for compensation?
The scandal does not include vehicles that were leased. This is when you pay for the use of a vehicle but do not actually own it unless you take out a purchase option at the end of the agreed leasehold term.
Neither does it include any bank loans that you may have taken out to buy a car as these are not linked to a dealer.
What if I want to buy a car now?
The ruling has led to car loan providers suspending car loan agreements as they scramble to rewrite contracts to ensure customers are protected from undeclared costs.
Some loan providers are expected to scrap commissions altogether. Others, including Honda Finance Europe, have prevented motorists from collecting their vehicles until the issue has been resolved.
How much will be paid out?
According to the FCA, a car buyer borrowing £10,000 over a four-year repayment plan could have paid as much as £1,100 more than they should have done.
Investment bank Jefferies has calculated the cost of making good the financial detriment for dealerships and the banks or firms who provided the loans for customers at £13 billion.
This compares to the £50 billion it cost banks to pay the PPI compensation – when customers in the 1990s to 2010s were sold payment protection insurance alongside a mortgage, loan or credit card against falling ill or losing a job. The PPI turned out to be poor value with banks using excuses not to pay out.
Banks have already been setting money aside in case they have to make payouts. It was the banks that offered commission to salesmen as an incentive for signing up customers for the loans. This added to the cost of the loans for car buyers.
Lloyds Banking Group, whose car loan arm is Black Horse, has already set aside £450 million to meet potential claims. But experts believe it eventually may need to earmark £2 billion.
Other major loan providers include Barclays, Close Brothers and Santander. Close Brothers is putting aside a £400 million capital buffer as a reserve against the crisis.
Stephen Haddrill, director general of the Finance and Leasing Association, says: ‘This is a significant and unexpected judgment, the implications of which stretch beyond the motor finance sector – making it an issue demanding the attention of the FCA.’
Nikhil Rathi, FCA chief executive, says that the judges’ ruling was rooted in the principle that ‘a car dealer must act in the best interests of the customer and not put themselves in a position of conflict’.
Will there be an appeal?
The two lenders in the Court of Appeal case, Close Brothers and MotoNovo, have signalled that they will be asking the Supreme Court for leave to appeal.
The regulator said it will ‘identify what action is required’ following such an appeal.
A spokesman for the Society of Motor Manufacturers and Traders says: ‘Manufacturers take their compliance responsibilities seriously and are assessing, with their finance providers, the implications of the judgment to ensure correct procedures are followed.
Any pause to operations is expected to be only temporary.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
