Car finance compensation: here’s what you need to know

Drivers who paid too much for their car finance face a longer wait for compensation after a court ruling that has opened the door to more claims.
The Financial Conduct Authority (FCA), the City regulator, this week suggested extending the time that lenders have to respond to complaints about car loans after the case in the Court of Appeal.
Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis ruled on October 25 that lenders and car dealers had a responsibility to tell borrowers about commission earned on any loan — opening the door to a flood of new compensation cases.
Millions of drivers who bought cars before 2021 were already in line for compensation because their loans were linked to commission paid to dealers, but this ruling extends the field of eligible finance deals.
It means that the compensation bill could now top £13 billion, according to Royal Bank of Canada Capital Markets, an investment bank. It is fast becoming a scandal that has been compared to the mis-selling of payment protection insurance, which cost the banks about £50 billion between 2011 and 2019.
Sara Williams, who runs the blog Debt Camel, said: “This could more than double the number of claims, so it is essential that the FCA takes time to consider the full new situation.”Here’s what you need to know:
Between 2007 and the end of 2020 about 14.6 million car finance deals included so-called discretionary commission arrangements, according to the FCA. This is where commission paid to dealers was linked to the interest rates charged on the loans, encouraging dealers to charge customers more. This was banned in 2021.
The FCA has been investigating the issue since January after a flood of complaints to the Financial Ombudsman Service from consumers who said they were not properly told about the link between the commission and their repayments.
Normally financial firms have eight weeks to respond when a customer makes a complaint. But the FCA paused this time limit pending the outcome of its investigation. Any complaints made after November 17, 2023, were put on hold until December 2025.
That pause could now be extended after the Court of Appeal judgment last month, which came after cases brought by Marcus Johnson, Amy Hopcraft and Andrew Wrench against the lenders MotoNovo and Close Brothers. The three customers lost their county court cases but won on appeal, with MotoNovo and Close Brothers being ordered to repay commission.
The wider ruling in their case covers any finance deal (not just discretionary arrangements) where commission was not properly disclosed. It could mean that compensation is due on up to 11.3 million more loans.
The two lenders said that they will appeal to the Supreme Court.
The FCA has not yet said how much further it will extend the time limit for lenders to deal with complaints, but a longer pause would mean they won’t have to decide on compensation without knowing the outcome of the court appeal. The regulator said that customers should, however, still make complaints about commission to the car dealers or lenders “as normal”.
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Because the Court of Appeal ruling applies to all commission, it does not matter what kind of finance you had.
If you were complaining about discretionary commission, which is what the FCA had been looking into before the court judgment, you would have needed to have taken out a Personal Contract Purchase (PCP) or Hire Purchase loan between 2007 and January 2021. You would not have been able to complain about a leasing deal because they do not charge interest.
Now though, the judgment appears to have opened the door to complaints about anything (if it is not overturned on appeal).
Coby Benson from the law firm Bott & Co said: “This Court of Appeal decision applies to almost all car finance taken out.”
The value of the commission in the three cases ranged from £183 to £1,651. Some £8.1 billion was paid in commission on the 14.6 million car finance deals that were subject to discretionary commission between 2007 and 2020. This would work out at an average payout of about £555.
The Financial Ombudsman could also award compensatory interest of 8 per cent a year on top that lenders would have to pay. This is standard with ombudsman judgments because it assumes that if you had not been out of pocket, you could have invested the money and made a greater return.
Anyone applying for compensation should check their loan paperwork. Even if the loan agreement said that they were paying commission, last month’s ruling said that if the exact sum was not spelt out in pounds and pence, then the deal may have been unfair.
You do not have to use a law firm or a claims company to lodge a complaint. Bott & Co has a free letter template on its website.
If you do not get a satisfactory response, you can take your case to the Financial Ombudsman Service within six months of the final response from the lender or broker.
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Last month some lenders, including Close Brothers and MotoNovo, briefly stopped writing new car loans because of concerns that their commission disclosures were inadequate after the Court of Appeal’s judgment.
While car buyers may have found their finance options were more limited, they would still have been able to find a deal. Many dealers not linked to a specific manufacturer have a panel of lenders to choose from rather than just using one.
Most firms that paused lending have now returned to the market. However, anyone buying a car on finance now may have to sign a disclaimer confirming they are happy with the commission the lender pays to the dealer. You will also have a 14-day cooling off period if you have second thoughts and want to cancel the finance agreement.
Umesh Samani from the Independent Motor Dealers Association, which represents about 1,500 car dealerships, said: “There’s no worries for anyone buying a car, the difference is that dealers now have to tell customers how much commission we are getting. I’ve not had anyone come in screaming for compensation. My advice to anyone who wants to make a complaint is, absolutely do so, keep it civil. We all have processes in place to deal with complaints.”
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