Car loan scandal payouts row - whats it about?

A compensation scheme over car finance mis-selling has been proposed by the financial regulator.

It comes after a Supreme Court ruling on Friday, that sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other credit providers to car dealers.

The judgement means millions of motorists will not be able to claim, but it left open the possibility of compensation claims for drivers who were subject to particularly large commission charges - which the Supreme Court said were unfair.

The Financial Conduct Authority (FCA) has now said it will consult on running a payout scheme.

The vast majority of new cars, and many second-hand ones, are bought with finance agreements.

About two million are sold this way each year, with customers paying an initial deposit, then a monthly fee with interest for the vehicle.

In 2021, the FCA banned deals in which the dealer received a commission from the lender, based on the interest rate charged to the customer. These were known as discretionary commission arrangements (DCAs).

The FCA said this provided an incentive for a buyer to be charged a higher-than-necessary interest rate, leaving them paying too much.

Since January, it has been considering whether compensation should be paid to people with these deals before 2021.

Any claims on this issue made to the ombudsman, which has 80,000 open cases, or the courts, were effectively on hold until Fridays Supreme Court ruling.

The Supreme Court considered three test cases. The cases focused on whether commission payments made by finance companies to dealers, of which the car buyers were unaware, amounted to bribery - and whether the car dealers themselves had a duty to act on behalf of their customers, rather than in their own interests.

If it had been upheld, this could have paved the way for millions to claim compensation, but the court ruled against two of the test cases, siding with finance companies.

This has narrowed the scope of people who will be able to claim compensation.

The consultation on who should be eligible and how much they should receive will begin in October, with the first payments expected next year, the FCA said.

Victims are likely to receive less than £950 per deal under the proposed compensation scheme, the regulator said.

It says that the total estimated cost of the redress will be between £9bn and £18bn.

The authority says it is "hard to estimate precisely at this stage the total cost to industry of the scheme", but millions of consumers could be eligible.

It added that the amount of money victims receive will depend on the "degree of harm suffered by the consumer and the need to ensure consumers continue to be able to access affordable loans for motor vehicles".

Those who have already complained do not need to do anything, the regulator said, advising those who have yet to complain to contact their car loan provider rather than using a claims management company.

It added that it "anticipate[s] requiring firms as far as possible to make customers aware they may be eligible and what they may need to do" and that claims "should cover agreements dating back to 2007".

The industry is expected to cover the full costs of any potential compensation scheme, including any administrative costs.

Lenders - including some of the UKs biggest banks and specialist motor finance firms - have set aside more than £2bn for potential payouts already.

Lloyds Bank has put aside £1.15bn, and Santander has allocated £295m.

Financing companies have also set aside millions, including Close Brothers (£165m), Northridge Finance (£143m) and MotoNovo (through the bank FirstRand, £140m). Some of that money has been earmarked to cover legal and administrative costs.

The FCA says any redress scheme would need to balance fairness to consumers who lost out, with ensuring "the integrity of the motor finance market, so it works well for future consumers".

On Friday, the Supreme Court reversed earlier court rulings in three test cases which said that hidden commissions on car loans were unlawful.

The one test case which was upheld was that of Marcus Johnson, 34, from Cwmbran, Torfaen, who bought his first car - a Suzuki Swift - in 2017.

He was not informed the car dealership was being paid 25% commission, which was added on to what he had to pay back.

"I signed a few documents and then drove away in the car," he told the BBC.

He said he had no option but to use finance when he bought the car, describing it as "heartbreaking" to find out so much extra money had been taken.

Mr Johnson said he was "pleased for myself" that his case was won, "but not for the hundreds of others" who will miss out. "Its a win, but its a really big bag of salt to go with it."

In his case, the Supreme Court said the terms of his finance deal were unfair due of the size of the commission payment, and the fact he was appeared to have been misled over the relationship between the finance firm and the dealer.

The FCA said Fridays judgement "helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts".