Car finance is one of the most significant forms of financial burden for UK households. In fact, it’s the second-largest cost after mortgage payments. Complaints against car finance lenders have almost doubled during the last financial year. This dramatic increase in complaints demonstrates the increasing harm being perpetrated by these lenders. Earlier this month, the Financial Conduct Authority (FCA) issued its second ever red alert over brokers. Yet their prevalent use of discretionary commission creates an inherent conflict of interest, which may lead to widespread mis-selling.
In January 2021, the FCA prohibited discretionary commissions in motor finance. This decision was made in the interest of protecting consumers and maintaining a level playing field. The ban is estimated to save car finance consumers around £165 million per year. The recent rise in complaints shows that issues still exist in the industry.
The latest statistics reveal a concerning trend: about 90% of complaints filed between 2022 and 2023 came from third-party representatives, such as claims management firms and law firms. The nature of those complaints have shifted immensely. Complaints about commission, fees and charges on car finance products jumped from 1,472 in 2021-22 to 5,658 the following year.
When purchasing or leasing a vehicle with financing, customers typically make a down payment. They subsequently sign a credit agreement where they repay the loan in fixed, monthly payments plus interest. For the last few years, over 90 percent of new vehicle purchasers have financed their cars with these deals. On top of that, a growing share of used vehicle transactions are doing the same.
The largest documented payout goes to a claimant who was awarded £5,300. The Financial Services Ombudsman decided in her favour, ordering the motor finance company involved to pay her the money owed. The claims management firm took a significant £1,325 slice off the award. They modeled this on a 25% contingency fee for their services. This has raised some alarms among consumer rights advocates who warn of the dangers of using third-party firms to bring claims.
Martyn James is a consumer rights advocate. He argues that too often people should address their grievances personally rather than leaving it to third-party claims managers. He stated:
“Don’t use a claims manager to make a complaint. If you are unhappy, then just explain what you are unhappy with.” – Martyn James
James went on to describe the endemic problem of car finance agreements in being mis-sold. He noted:
“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.” – Martyn James
On the complaint front, the Financial Ombudsman Service is cognizant of the upward trending complaints and has been swiftly investigating these predatory practices. A spokesperson mentioned:
“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
Even with the FCA’s ban on discretionary commissions, consumers are still significantly exposed to mis-selling practices. James called the present scenario a “blight” of claims management companies preying on people with car finance complaints. He expressed concern that these firms resemble those that previously dominated the PPI market, where mis-selling scandals caused widespread financial distress for consumers.
One of our customers came to us with the story on how she emhargegged £599. This charge came despite her having accepted a six-month payment holiday from her hire purchase contract as part of COVID measures. The motor finance firm was ordered by the ombudsman to pay her £300 after he intervened and ruled that she deserved payment.
Meanwhile, claims management companies are doing very well in this difficult climate. At the same time, advocates recommend consumers approach their complaints with care. Most claims management companies take about 25% + VAT from the compensation they get back for clients. This fee eats into the monetary recovery that clients are left with after the whole process.