The vast majority of new cars, and many second-hand ones, are bought with finance agreements.
In 2021, the FCA banned deals where car dealers received commission from lenders, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs) and were often not disclosed.
The FCA said this provided an incentive for a buyer to be charged higher interest rates than necessary, leaving them paying too much.
The regulator, using the basis of court judgements, has also said other sales were unfair. They are:
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High commission arrangements – where the commission was equal to or greater than 35% of the total cost of credit and 10% of the loan
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Tied arrangements that gave a lender exclusivity or a first right of refusal, without drivers being clearly informed
The lenders’ trade body has argued that these conclusions were too broad-brush, and compensation could be too generous.
“That would result in redress being paid to millions of customers who experienced no unfair relationship, or no loss, diverting resources away from those for whom redress is genuinely due,” the Finance and Leasing Association (FLA) has said.
Major lenders, including Lloyds – the UK’s biggest banking group, have set aside billions of pounds already. Close Brothers has cut hundreds of jobs owing to its exposure to the compensation scheme.
