Mis-sold Car Finance: Understanding Your Rights

In January 2024, the Financial Conduct Authority (“the FCA”) launched an investigation into the motor finance market, focusing on mis-sold car finance and the banned practice of discretionary commission agreements in respect of car, van, motor home, and motorbike PCP or Hire Purchase agreements.

Martin Lewis exposes the issue

Money Saving Expert, Martin Lewis, highlighted the issue stating on his website: “In about 40% of car finance deals, there were hidden ‘discretionary commission arrangements’. This is where lenders allowed brokers & car dealers to ‘up the interest’ to increase their commission – so you overpaid, without knowing.”

FCA and Ombudsman response

In response to the one million mis-selling claims, the FCA stated, “firms are rejecting most complaints because they consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements.” However, the Financial Ombudsman Service has ruled in favour of a few customers, including cases involving Black Horse Limited and Clydesdale Financial Services Limited (trading as Barclays Partner Finance).

What’s it all about?

Background

At the heart of the issue is the relationship between the car dealer, the finance broker, and the car finance lender, often referred to as tripartite or triangular agreements. The blurring of roles and duties facilitated by the lender leads to car finance mis-selling.

FCA core principles

Both the dealer/broker and the lender are regulated by the FCA and bound by its rules, which include:

1. A firm must pay due regard to the interests of its customers and treat them fairly.
2. A firm must pay due regard to the information needs of its clients and communicate information clearly, fairly, and not misleadingly.
3. A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

Unfair relationship

The Consumer Credit Act regulates fairness between the creditor (the bank or finance company) and the debtor (the hirer, borrower, or customer). Unfairness can arise from:

• Terms of the agreement or related agreements.
• The way the creditor enforces rights under the agreement.
• Any other actions by the creditor.

In cases involving discretionary commission, a legal test applies: a payment is made by one party (lender to dealer) with the knowledge that the dealer is dealing with the consumer, but fails to disclose the payment. This practice puts profit above consumer interests.

Duty of care

The broker, often the supplying dealer, must provide impartial advice or recommendations to the customer. Recommending inflated interest rates for personal gain is not impartial.

Potential outcomes

The court can order the finance agreement to be unwound or award compensation.

Wider implications

The issues surrounding car finance mis-selling can apply broadly in other vehicle finance situations.

This article is an overview of the law and does not replace formal legal advice tailored to your specific query. For further information, contact Stormcatcher Law at 0333 700 7676 or email knowledge@stormcatcher.co.uk.

As a consumer rights lawyer for mis-sold finance, we use our expertise and experience to advise on mis-sold car finance. Book a 1-hour consultation with The Car Lawyer for £250 + VAT per hour. Conferences will be via Zoom. Terms and conditions apply.