The UK car finance scandal explained and are Irish consumers impacted?

Bank of Ireland has more the doubled the funds set aside to compensate customers

The FCA said it estimated that 14.2m loan agreements – 44% of all those made since 2007 – would be considered unfair and therefore due compensation.

Millions of people in the UK are on track to receive payouts averaging £700 (€806) in a compensation scheme for victims of a car finance scandal.

This is to do with the alleged mass mis-selling of car loans – a scandal that involved “secret” commission payments by lenders to car dealers, and millions of car buyers unknowingly paying more for their finance than they should have.

Bank of Ireland is involved as it provided car finance in Britain via its Northridge Finance business. The bank had set aside £143m (€167m) for repayments but now estimates that the provision could increase from £143m to £350m (€400m). 

Last week, Britain's watchdog Financial Conduct Authority (FCA) published its long-awaited proposals for an industry-wide scheme to compensate millions of consumers. The proposed scheme would cover motor finance agreements taken out between 6 April 2007 and 1 November 2024 where commission was paid by the lender to whoever sold the loan – usually the car dealer.

The FCA said it estimated that 14.2m loan agreements – 44% of all those made since 2007 – would be considered unfair and therefore due compensation.

However, that probably does not translate into 14.2 million people getting a payout, as some motorists bought several cars in the period and could therefore be eligible for multiple payouts totalling thousands of pounds.

The vast majority of new cars and an increasing number of used vehicles are bought with motor finance, typically either a personal contract purchase plan or a hire purchase agreement.

Who is in line for compensation?

The scheme the regulator is consulting on will largely focus on people whose deal included a “discretionary commission arrangement” (DCA), a particularly controversial type of car finance banned in 2021.

With DCA, lenders gave dealers the power to set the interest rates, with dealers getting more commission the higher the rate. This allegedly gave dealers an incentive to overcharge customers. It is the lenders – typically banks – who are on the hook for the compensation. The FCA estimates that 11.4m such loans are likely to be eligible for a payout.

However, there are also two other main types of case. The second-biggest category – accounting for 3.2m loan agreements that are likely to be in line for compensation – is where there was an arrangement between the lender and the dealer that gave the lender exclusivity or first refusal when it came to providing credit, which was not properly disclosed.

The third type – accounting for 2.9m eligible cases – involves unfairly high commission (where the commission was at least 35% of the total cost of the credit and 10% of the amount borrowed) that was not properly disclosed.

Some of the loan agreements will fall into more than one category, which is why adding up those three figures comes to more than 14.2m.

How much money will people get?

The FCA said in August that it estimated “most individuals will probably receive less than £950 in compensation per agreement”. Now it expects eligible consumers to receive an average of about £700 an agreement, with many receiving more than that “and a large number receiving less”.

FCA documents suggest that for DCAs, the mean proposed payout (the arithmetical average) would be £665, while the median figure (the middle value in a dataset) would be £517. The regulator said this was a complex issue and “not everyone will get everything they would like”.

What about Irish consumers?

The Central Bank of Ireland has also banned DCA type arrangements in Ireland issuing a warning to finance firms to cease the preactice from July 2024 but it has not flagged a wider probe similar to the UK watchdog. Sinn Féin TD Pearse Doherty raised the issue in the Dáíl earlier this year the Minister for Finance if he will review the practice of car dealers receiving commission from motor finance lenders. In response Minister Paschal Donohoe noted the Central Bank's decision to ban practice and said any consumer who has any concerns in relation to their motor finance product taken out in the past should contact the lender first and then has the option of a complaint to the Financial Services and Pensions Ombudsman (FSPO).

Additional reporting The Guardian