Mis-sold car loans - did it happen to me?

0:00Hello, Ed Conway here. Here is what might sound like a slightly random question. What do AirPods, bananas and a pair of shoddily made running trainers from the 1970s have in common? On the surface, not very much. But on my podcast, Stuff Matters, I will uncover the deeper stories behind each of them. You will see how together they tell a fascinating new story about the world we live in. The first full series of Stuff Matters is out now. Just search for it on your podcast app and follow. Coming up on The Daily, the car dealers making hidden commissions on loans that they brokered, and why you might be in line for compensation.

0:39Hello, Ed Conway here. Here is what might sound like a slightly random question. What do AirPods, bananas and a pair of shoddily made running trainers from the 1970s have in common? On the surface, not very much. But on my podcast, Stuff Matters, I will uncover the deeper stories behind each of them. You will see how, together, they tell a fascinating new story about the world we live in. The first full series of Stuff Matters is out now. Just search for it on your podcast app and follow. Car salesmen haven't always enjoyed the best of reputations, to which you might retort, well, neither have journalists.

1:18And yeah, you'd have a point. But no one has ever paid me a hidden commission for doing this podcast. And that's sort of what the dealers were doing. earning money from the lenders providing those motor finance loans that they then offer to their customers and not being as obvious about the commission they were earning as they might have. So there's been an intervention by the Financial Conduct Authority, the FCA, and motorists could now be in line for hundreds of pounds in compensation. We will be speaking in a bit to the industry body, the Finance and Leasing Association, who say the compensation is being set too high.

1:55To be clear, we do think customer loss was very significantly lower than what the FCA suggested here. But let's start with our business correspondent, Gurpreet Narwan. Gurpreet, just explain exactly what's at stake here. This all relates to the way we buy cars in this country. The vast majority of cars are bought on finance. So you'll go to a car dealer and they'll find you a car, but they'll also arrange a loan for you. And you pay that back each month, plus a bit of interest. So what has been the problem with that? That sounds pretty much like the way I bought my last car, in fact. Yeah, it all seems pretty straightforward enough.

2:32But the problem is that many of these car dealers were also receiving commissions behind the scenes from the lenders, so the banks, in order to sell their loans without telling the customers. And it's this lack of transparency that's now become a problem. These commissions, I mean, what were they based? Was it just a flat fee for every time that they used a specific lender? It varied. It's a very complicated picture because on the one hand, you just had straightforward commissions paid to the dealer. Sometimes the dealer would tell the customer about it. Sometimes it'd be buried in the terms and conditions.

3:13Sometimes there'd be no reference to it whatsoever. But there was a more egregious form of this type of practice, which was widespread before 2021. So that's before the FCA formally banned it. And this is called discretionary commissions. Now, discretionary commissions effectively involved a lender paying the dealer a commission based on how high an interest rate they could get from the customer. So just to make sure that I've got this absolutely right in my head. So the car dealer would receive a bigger commission if more interest were charged on the loan, meaning that I would be paying more money for my car by the end of the repayment period.

3:56Yeah, so say I sold you a car and I managed to get you on a 2 % interest rate instead of a 1 % interest rate, well, then that would be great for me because I could then get a higher incentivised commission from the lender who's advanced you the loan. So I stand to benefit from you paying more for your car. So how much are the banks and the other lenders expected to be paying out then? Well, it varies because we actually don't know how widespread the practice was. The FCA, in the process of its redress scheme, is consulting on the whole package. And it could be anywhere in the region of£9 billion to£18 billion.

4:34Of course, one of the things that makes this difficult is that we're talking about almost 20 years back now. And actually, there's not paperwork often left over from 2007 or so. Many of the car dealers, Some of them might not exist anymore. Some of them may not have the paperwork. And customers as well. If you bought a car back in 2007, you probably haven't kept hold of the paperwork. So it's very difficult to put a precise figure on it. Now, I know I'm the other side of a particularly rough weekend, Garpreet, but I do distinctly remember at the tail end of last week, wasn't the Supreme Court asked about this?

5:06And the Supreme Court was ruling not in favour of those purchasing the cars, but those on the other end of the transaction. It's slightly different, actually. The Supreme Court wasn't looking at these discretionary commissions that we were talking about. It was looking at the whole industry in general and was looking at all hidden commissions. And what the Supreme Court was deciding was whether any form of hidden commission was an illegal payment. Did the dealers owe customers loyalty? Did these hidden payments amount to bribery? And it decided that they didn't. It was more or less a win for the banks.

5:40And there was£44 billion of compensation payments that might have had to go out the door if the Supreme Court had found the other way. It was so severe that actually the government was thinking of stepping in. Let's turn our attention to that, the Financial Conduct Authority scheme that is out for, as I understand it, consultation. So not set up just yet. But as we understand it, how does that compensation scheme look? What are people likely to get? I mean, who qualifies? It specifically targets those who may have got caught up in these discretionary commissions. Now, a lot of people might not know whether they were embroiled in that or not.

6:15And the FCA is basically urging anyone who thinks they may be affected, which might be a large chunk of those who bought cars on finance before 2021, to come forward. But they're unlikely to get more than about£950 each. Obviously, things have changed with the ban on discretionary payments. But the Financial Conduct Authority says this, firms were not complying with the law or our disclosure rules. So, I mean, if you are buying a car on finance, what should the car dealer be telling you at that point? Well, I think what the courts have indicated now is that dealers selling cars to their customers on finance need to explicitly tell them if there are commissions being paid.

6:57I think that is, and I think even though the Supreme Court found in favour of the banks, I don't think they're going to take any chances now, dealers, with these hidden commissions, because in the end, it's just probably not worth it for them. So if someone has bought a car between 2007 and 2021 in this manner, what do they need to do? I'm asking for a friend here. You should be able to apply directly through the FCA. And one thing they pointed out is they're sort of urging people to go direct. You will have seen a proliferation of law firms and claims management companies. You might have been targeted on Instagram or on Facebook.

7:35But one thing that the FCA is concerned about, and indeed the Solicitor's Regulatory Authority as well, which put out a joint statement with the FCA recently, is that a lot of these companies have hidden fees, perhaps. So there might be large exit fees. If you decide that you don't want to push forward with your claim, you might have to then pay an exit fee. They also obviously take a cut from whatever you get as well. It could be as high as about 30%. Can we maybe look at this from the other end? I mean, I don't want to sound like I'm on the side of the bankers here, but people who signed these contracts, I mean, the interest rate was there in front of them in black and white, wasn't it?

8:11No one was press-ganged into agreeing to a higher rate of interest, were they? And that was the argument of the banks. You know, they say that customers could have shopped around. You could go to a bank to get a loan. No one was forcing you to take out a loan with the car financing companies. conversely on the other side some would argue well not everyone is financially sophisticated to shop around they put their trust in the dealer they believe is giving them the best deal possible and it's just a very normal way of buying a car and it would be fine to use that argument and say well they could have shopped around and all of this but at the very minimum they should have been informed and they should have had an honest dealing with the car dealer.

8:57Garpete, thank you. So what of the lenders themselves? Are they wildly aggrieved or breathing sighs of relief? Let's speak to Adrian Daly, Director of Motor Finance at the Finance and Leasing Association. Good to have you with us, Adrian. Look, first and foremost, your response to that which we've heard from the Financial Conduct Authority. Do you guys accept their decision in this? Not at this stage. Essentially, what the FCA have suggested is a certain amount of compensation, but that very significantly exceeds what we had previously thought to be an estimation of potential customer loss. So at the end of the day, this is the start of the FCA's work, not the end of it.

9:38They will be consulting in detail on what they eventually propose, probably in October and finalised it in December. So we look forward to seeing the detail in due course, in particular, what are their workings. But to be clear, we do think customer loss was very significantly lower than what the FCA suggested here. Of course, compensation is not simply to make sure that customers are not out of pocket. There is a punitive element to this as well, isn't there? We don't think so. It's a question of loss. If a breach of a rule has caused loss, then that loss should be recompensed. With appropriate interest, of course, if it's a long time ago.

10:18But these are practices that were a very long time ago, up to 20 years ago. They're not practices that exist now or have done for many years. But ultimately, you have to get to the bottom of what happened, who was affected. So, Adrian, am I right to think then that yours will be, how do I characterise this, a robust engagement with the consultation process that is going on right now? All parties should engage robustly in this process. because this is a public consultation from a statutory regulator. So firms and consumers will have their say and can bring the evidence towards the FCA if they think what is proposed is fair or not.

10:54Why on earth was the industry then paying these discretionary payments to car dealerships, in essence, for brokering these loans in the first place? And why was the customer not made aware of them? First of all, on the second point, these were not secret payments. The existence of commission was always public, and information about those commission arrangements were always available. So they were never secret. But why should there have been discretionary commission arrangements? That's a different question. DCAs, as they're given in short, have been banned. But it doesn't mean to say that every DCA in the past was harmful.

11:29Indeed, the majority were beneficial because ultimately, when you or I go into a car dealership to buy a car, you're concerned about three things typically. One is the price of the car you're trading in. second the price of the car you're buying and third the price of the finance. Now ultimately it's a negotiation in a dealership and ultimately the car dealers if they want to sell that car have got to basically make the numbers fit to what we're prepared to pay and that means yes of course dealers have discretion on the price of the trade-in and they've got discretion on the price of the car you're buying and they used to have discretion on the cost of the finance basically to bring that price down to match your budget.

12:10Now, obviously, what goes down could go up, but the vast majority of occasions, the finance price went down to benefit the customer. However, we always felt that it's a more transparent market if the price of the finance is fixed. And that's the position that the industry moved to. I mean, the key word there is transparent in your answer, isn't it? Because of course, the one aspect of the Court of Appeal decision that the Supreme Court upheld, just the other side of the weekend, was the case where the man was expected to read an incredibly long contract just to discover the size of the fee that was being paid out.

12:45And more than that, isn't it the case that the reason the FCA is going hell for leather in terms of compensation is because of the size of those fees. I mean, one guy was paying 25 % commission to the garage on a car that cost, you know, six grand. Yes, there was a case, one of the cases, where unfairness was established. But the major part of the Supreme Court judgment on Friday was about what's the nature of the relationship between a dealer and a finance company and a customer. And ultimately, it came to the very obvious conclusion that ultimately, all those three parties act in their own self-interest.

13:24The customer wants a good deal. If they don't get a good deal, they walk away. The finance company needs to offer a fair deal and the dealership needs to make a living. But surely you're not attempting to justify a 25 % of the money that a motorist paid overall going to the garage as a commission fee that he was not told about orally, was in the detail, I admit that. You can't be justifying that. No, what we're saying is, overall, the vast majority of customers historically got a very good deal from their finance that enables us all to get cars at a good price that we can afford and drive away the car.

14:01But we do accept there will be some examples historically, and bear in mind in the Johnson case, that was nearly a decade ago, where customers did not get a good deal. Can we have an assurance, though, that your members, as you say, there are cases that could be going all the way back to 2007. And if I were looking for contract details from 2007, 2008, 2009, I might not have them. Can we have an assurance that your members are not currently, you know, disappearing things that are moving data away, that this data will be preserved until this compensation scheme is up and running? Well, all of us, whether we're consumers, businesses, public bodies, we cannot keep information that's personal.

14:41for longer than is necessary. And that applies to firms as well. So the further back you go, the less likely is that us as consumers or firms have that information. It's very difficult to ensure a fair process for both parties, for consumers and for businesses, if you go that far back, because one or other of the parties isn't going to have the information, or at least full information in order to judge the case. Your organisation's members are now expected to make it clear in the T's and C's just how much commission they're charging people buying cars. But why was the industry just not doing that in the first place?

15:16The amount of commission was always available on request. The rules set by the regulator required the dealership to disclose the amount of commission if we asked, as I always did when buying a car on finance. And that right has always been there. And ultimately, the industry has always complied with the rules on commission disclosure. If the robust engagement, which I'm certainly taking from this interview, that you will be providing to this process. If that does not result in the Financial Conduct Authority changing course or reducing the numbers, I mean, how damaging could it be to your members?

15:53Well, it's always damaging if you have a redress scheme that overcompensates, provides a windfall that's not deserved. Ultimately, this scheme needs to be right. We accept there were some customer losses historically. We need to accurately identify who those were and how much was lost and rent prevents it very simply because bear in mind here one of one of the benefits here of the process the FCA announced yesterday is a very simple process. FCA will be consulting on and finalizing the scheme between now and the end of the year and then the scheme goes live for consumers in 2026 and it will be very simple to engage with so consumers don't need to do anything now they don't need to use a claims firm they don't need to make a complaint the FCA will decide how this works and it will be very simple to engage with when it opens probably in early 2026.

16:43Thanks Adrian. And that is your lot for this edition of The Daily. We're back again tomorrow.

16:53Hello, Ed Conway here. Here is what might sound like a slightly random question. What do AirPods, bananas and a pair of shoddily made running trainers from the 1970s have in common? On the surface, not very much. But on my podcast, Stuff Matters, I will uncover the deeper stories behind each of them. You will see how, together, they tell a fascinating new story about the world we live in. The first full series of Stuff Matters is out now. Just search for it on your podcast app and follow.