Car finance is now one of the biggest drivers of financial distress for UK homes. If you’re a typical American household, it’s probably your second largest cost after mortgage payments. Claims management firms are coming to the forefront, bringing critical issues in this sector to light. Those current practices, as experts have recently pointed out, have been likened to the notorious payment protection insurance (PPI) mis-selling scandal.
This is why we applaud the Financial Conduct Authority (FCA) for taking action to end these shocking practices, endemic within the car finance industry. In January 2021, the FCA acted boldly by banning discretionary commission structures. This ban makes it impossible for brokers to be subsidized to do things that are not in their customers’ best interest. This very sensible shift in regulation is expected to save consumers around £165 million a year.
We appreciate that, after complaints about car finance lenders more than doubled in the last financial year. Indeed, 90% of the complaints that were filed in 2022-23 were filed by third-party representatives. This second category comprises claims management businesses and law firms. Claims for commission, fees, and charges for car finance products skyrocketed by a staggering 990%. They surged up from 1,472 in 2021-22 to 5,658 in 2022-23.
More than 90% of new cars are now financed at the time of sale. On top of that, more and more used cars are being purchased through finance. Usually, constituents are required to place some form of deposit to set up these plans. They sign a credit agreement, agreeing to a series of monthly payments which include interest.
In one notable case, the ombudsman ordered a motor finance firm to compensate a customer £5,300 after a complaint was upheld. If you have a claims management company involved, they will probably take about £1,325 from your compensation. This is based on a typical 25% fee. This raises very serious concerns as to the financial consequences of claims management firms on consumers seeking appropriate redress.
One customer was charged £599 after taking a six-month payment holiday on her hire purchase contract. This fee became an issue when COVID-19 hit. The ombudsman determined that the motor finance company owed her £300 in compensation for this fee.
Martyn James, a consumer rights expert, emphasized the troubling similarities between current car finance practices and the PPI mis-selling scandal. He stated, “Mis-selling certainly seems to have been widespread when it comes to affordability – and the inherent complexity of how these deals work makes it very difficult to know where you are with the deal and what you will ultimately owe.”
This too extends well beyond anecdotal complaints. More importantly, it should raise serious questions about the integrity of the entire car finance market. A spokesperson for the Financial Ombudsman Service acknowledged these concerns, stating:
“Don’t use a claims manager to make a complaint. If you are unhappy, then just explain what you are unhappy with.” – Martyn James
As industry faces increasing scrutiny and regulatory pressure, consumers need to know what rights they have. It’s equally important to understand the intricacies of their financial deals. The auto finance world is a rapidly evolving space. Keep your guard up to avoid being a victim of future broking mis-selling schemes.
“We are investigating the issues raised by these complaints carefully. We will continue to look at each case on its own individual merits and circumstances.” – Financial Ombudsman Service spokesperson
Amidst growing scrutiny and regulatory changes, it remains essential for consumers to understand their rights and the complexities of their financial agreements. As the landscape of car finance continues to evolve, vigilance is necessary to avoid falling victim to potential mis-selling practices.