Martin Lewis: Huge car finance mis-selling news as industry-wide redress scheme planned – here's what's happening

Martin Lewis: "There's been a huge announcement today by the financial regulator, the FCA [Financial Conduct Authority], about car finance mis-selling.

"I'm Martin Lewis from MoneySavingExpert.com. This is my instinctive reaction to the news that's been put out today. I'm going to try and talk you through it, but of course we haven't dotted all the i's and crossed all the t's yet. So this is big picture stuff.

"What the regulator has said, is if there is going to be a mis-selling payouts, it's going to be through an industry-wide redress scheme. Technically, it says it's consulting on that, but that pretty much means it's made its mind up. Therefore, this is under what's called Section 404 rules, people aren't going to have to put complaints in to get money.

"The regulator's going to tell lenders; 'find everybody who was mis-sold under the criteria we give you and then pay them out based on a formula that we're going to give you'. So it's going to mean masses more people, based on whatever the mis-selling is, are going to be paid out because it's going to be proactive rather than people having to complain.

"Now, what's very important on this is anyone who is thinking of doing this via a claims firm, who are going to take 25% of what you get, just don't do it because it's very likely, if a payout is going to come, you're going to get that money automatically. You can still use a free form like the ones on my website, because there's no impact on you doing that – if you want to put a put a mark in the sand, I'll talk more about that later...

"But this is absolutely huge news. Of course, what we don't know yet is what the criteria for mis-selling is. Now, it's important to understand there are two very different cases of car finance mis-selling.

"The first one that came about and the one I've mostly talked about – and if you've used the free tool on my website, MoneySavingExpert.com, to complain; you're one of those 2 million people who've put complaints in, this is likely you – is 'discretionary commission arrangements', DCA complaints.

"Now what that is, is if you bought from a car dealer or a broker on PCP [personal contract purchase] or hire purchase [HP] deals between 2007 and 2021, then often those dealers would pump up the interest rate you were being charged without telling you in order to gain more commission. And lenders were allowing them to do that.

"And the regulator is saying, 'well, we think that breaches our regulations. Lenders shouldn't have allowed that'. This is all about the lenders you get your money back from, not the dealers, by the way. So that's the first type and that affects 40% of car finance arrangements.

"The second type came about not from the regulator but via a claims firm taking a case that was then ruled in the Court of Appeal last year and was a massive shock. No-one was expecting it, including the regulator, including me.

"What the Court of Appeal ruled, and this is called 'commission disclosure' cases, is that if the car finance agreement didn't tell you the amount of commission that was being paid, then it was a breach. And that affects 99% of car finance deals and it's not just PCP and HP, it includes leasing too. And there's no date on it. So how far you can go back is a question, but not how recent it is.

"The Supreme Court, which is senior to the Court of Appeal, is hearing an appeal on that on the 1 to 3 April, and it is the final court to decide. It will then probably take some weeks before it gives us the result.

"So whether that is in play or not will be decided by the Supreme Court. And in fact, all of this now awaits the Supreme Court's decision.

"Let me tell you what I think, from talking to people, are the likely outcomes. The most likely outcome is the Supreme Court will overturn the Court of Appeal so that those commission disclosure cases don't happen.

"But the regulator will still continue with discretionary commission arrangement cases, those 40% of cases, those are the ones where they pumped the interest rate up. In that case, the payout's likely to be in the single digit billions or maybe getting up to £10 billion. I think that's the most likely outcome. That's the total payout.

A possible outcome is the Supreme Court upholds the Court of Appeal, which would be absolutely massive. I mean, even I've been talking about, I think this one may be overblown and could be potentially damaging to consumers because it was just going to send a wrecking ball through the whole way that consumer finance and consumer credit works.

"If the Supreme Court backs that up, then there would be a redress system put in place by the regulator for both. That could potentially be tens of billions of pounds, PPI type scale, have economic impact and even could be to the extent that I wouldn't be surprised to see potential Government legislation to intervene on it. But I think that's a less likely outcome than just DCAs.

"An unlikely, but not impossible, outcome is the Supreme Court says something/ overturns/ says the Court of Appeal is wrong/ but says something in its judgment that actually makes the regulator think that it can't do a redress scheme for DCAs. I think that is unlikely, but it would be amiss of me not to tell you that it is a possibility.

"So, let's move on and let's look at if this does all go through how much would be paid out? Well, the honest answer is we don't know. From what I hear, the regulator has not yet decided what the payout would be.

"For discretionary commission arrangements, I think it probably boils down to somewhere between two things. The first one would be; if they pump the interest rate up from the minimum; you would get all the difference between the minimum of what they pumped it up to back, and the typical payout for that is going to be around £1,100.

"But what the regulator may say is no, actually this is too low. We're going to say what we think a minimum interest rate is, and that might vary depending on situation. And we're only going to give you the difference back between the minimum interest rate and what you were charged. And there's precedent for that in what was called the 'Plevin case' in PPI, but you don't really need to know about that.

"As for if the Supreme Court upholds the Court of Appeal on commission disclosure arrangements, remember the two types of discretionary commission; where they bump the interest rates up, and commission disclosure; all of them. Well, no one's got a clue what the payout would be on that. I mean, just don't have a clue. But you get DCA payouts and that one, don't know.

"Is it worth complaining now? On the whole, no, because we think it's going to be mass redress. But, I mean, it might be worth putting a line in the sand if it doesn't cost you and you want to put a complaint in – we've got free tools on MoneySavingExpert for discretionary commission arrangements. We have them for commission disclosure too, although I'm not as encouraging that people do that particular one – just so the company knows who you are.

"There are going to be issues. Lots of people are already asking me, what if I moved house? What if they don’t have my address? I don't know yet. This is principles based. This is the regulator's intent. But we don't yet have the dotting the i's and crossing the t's. I mean, I hope it would look to make sure everyone's treated fairly.

"If not, I know my team and I will be all over this asking and pushing and lobbying on those questions to make sure that if there is a redress scheme, people don't unfairly miss out due to bureaucratic reasons. I hope I've covered everything. I've written more on this in a post on social media, but that's to give you an idea of what's going on.

"Look, my possible outcomes – it's still some guesswork based on what I'm hearing at the moment. No-one knows what the Supreme Court is going to rule. But the concept – that if mis-selling is agreed upon, you won't have to complain; you're just going to get a payout [exhale] – this could be huge. Watch this space. Things change in this area."