Last month, the UK government’s financial regulator, the Financial Conduct Authority (FCA), announced that it was conducting an investigation into car finance agreements. The agreements are called Discretionary Commission Arrangements (DCAs), which were banned in 2021as it was felt they were not fair to customers.
Prior to 2021, car finance agreements allowed a broker to manipulate the interest rate offered by the finance company, increasing or decreasing the customer’s monthly payments.
There was a hidden step involved with DCAs, whereby the finance company would indicate its approval at (say) 6% interest. But rather than telling you that the lender had approved your application at that rate, the dealer would then have the ability to increase that interest rate to (say) 11% without telling you.
The dealer would then receive additional commission from the lender for doing this, so both were profiting from this activity.
The FCA says that the finance companies have received approximately 10,000 complaints about these agreements over the past few years, but almost all of them were rejected. A couple of customers, however, took their finance companies to the Financial Ombudsman Service and won.
This caught the attention of the FCA and they are currently investigating the situation. Until their investigations are complete, you can’t file a complaint against your finance company.
How to check if car finance had a DCA
Finance agreements with DCAs were usually used car finance agreements, in the form of a hire purchase (HP) or personal contract purchase (PCP), and usually arranged by the dealer selling you the car.
You can contact your car finance lender (not the dealer) and ask them. They are obliged to tell you if your finance agreement had a discretionary credit provision.
How to claim
Right now, you can’t. The FCA has paused the complaints process for DCA agreements while it conducts an industry-wide investigation into the process. This is expected to take until the end of September 2024.
You can certainly contact your finance company in the meantime to ask whether you had a discretionary commission agreement. This won’t prevent you from pursuing the matter later once the FCA makes its decision.
If the FCA decides that industry-wide redress is needed for DCA agreements, it will put a claims process in place. There will be a clear time limit for making claims (the FCA has indicated 15 months).
If the FCA decides that it’s not an industry-wide problem, then your chances of getting compensation will be significantly less.
Next steps
There’s unlikely to be any official news for a while yet as the FCA indicated it will set out its next steps in Q3 2024, so that’s at least July.
The Financial Ombudsman Service has shared some of the complaints it has received. This one is from Tom, whose claim was upheld after the ombudsman deemed the lender hadn’t carried out the appropriate affordability checks:
Tom was struggling to keep up with his car finance repayments. When his lender told him that it was taking the car back and that it could affect his credit file, he took his case to the FOS.
Tom told the ombudsman that he was 24 years old, working, and living in rented accommodation. His take-home pay was around £1,200 each month, he paid about £450 in rent, £200 in utility bills and food, plus £200 each month to a credit card and previous car loan that hadn’t been cleared. His new car finance agreement cost £245 each month over three years.
The Financial Ombudsman found that had more appropriate checks been carried out, the finance provider wouldn’t have agreed to the credit and would have declined the application. To put things right, the finance company was told to take back the car, cancel the remaining finance amount, correct any adverse entries it had applied to Tom’s credit file, and refund his deposit with interest.