Mis Sold Car Finance Reasons

Mis Sold Car Finance Reasons2024-02-02T15:00:19+00:00

Understanding The Reasons Behind Mis Sold Car Finance

A Guide to Car Finance Mis-Selling

Car finance has become an integral part of the car sales industry, offering consumers the flexibility to drive away with a vehicle that might otherwise be beyond their immediate financial reach. However, the complexity of finance agreements and the potential for the lack of transparency between the finance provider and the consumer have given rise to concerns around mis-selling. This page aims to educate you on the types of mis-selling which may have occurred and which may make you eligible to make a claim against your Hire Purchase (HP) or Personal Contract Purchase (PCP) provider.

What is Car Finance Mis-Selling?

Mis-selling in car finance occurs when consumers are not provided with clear, accurate, and sufficient information to make informed decisions, or when the product sold is not suitable for their needs and circumstances. This is often an unethical, and sometimes illegal practice that has potential to do harm to the consumer. This can result in individuals committing to financial products that are unsuitable for their needs or that they do not fully understand.

What Are the Main Types of Mis-Selling?

The Financial Conduct Authority (FCA) has highlighted several areas of concern regarding mis-selling in car finance for consumers who may wish to make a claim. These include:

Misrepresentation

If the finance agreement was mis-sold or misdescribed to the consumer, particularly if they’re unhappy with a key term, like the annual mileage allowance.

The FCA’s guidelines on misrepresentation stress the importance of providing information in a manner that is clear, fair, and not misleading to the consumer. Misrepresentation in the context of car finance can occur when customers are not given accurate information regarding the terms of the finance agreement or the features and costs associated with the car. The FCA’s Insurance Conduct of Business (ICOB) rules mandate that fair, clear, and non-misleading communication is a cornerstone of consumer finance transactions.

Misrepresentation can include:

  • Failing to disclose significant limitations or exclusions of the finance agreement.

  • Making misleading comparisons to other finance products.

  • Overselling the suitability or benefits of a financial product.

  • Providing information that is incorrect or omitting important facts.

  • Misstating the customer’s responsibilities under the finance agreement.

Excessive End-Of-Agreement Charges

Consumers may have a case to claim if they are unhappy about charges that they’ve been asked to pay at the end of the agreement.

Excessive end-of-agreement charges in car finance refer to unreasonable or unexpected fees that consumers are asked to pay at the end of their finance contracts. The Financial Conduct Authority (FCA) has highlighted this as an area of concern because it can indicate that consumers were not adequately informed about the potential costs they would face at the conclusion of their agreement or that the charges are unjustifiably high relative to the service or damage being charged for.

The specific types of end-of-agreement charges that might be considered excessive include:

The specific types of end-of-agreement charges that might be considered excessive include:

  • Excess Mileage Fees: Many car finance agreements, such as Personal Contract Purchase (PCP) plans, stipulate a maximum number of miles that the car can be driven over the contract period. Exceeding this limit can incur substantial charges. If these limits and the associated fees were not clearly explained at the outset, they could be deemed excessive.

  • Damage and Wear Charges: At the end of a lease or finance agreement, the vehicle is assessed for any damage beyond normal wear and tear. Charges for repairs to bring the vehicle back to a condition specified in the agreement might be imposed. These charges become excessive if they are disproportionate to the actual cost of repairs or if the definition of ‘normal wear and tear’ was not transparently communicated.

  • Early Termination Fees: If a consumer chooses or needs to end their finance agreement early, they may be subject to early termination charges. These fees can be excessive if they are not reasonably calculated to compensate the finance company for the loss incurred due to the early termination.

  • Disposal Fees: Some agreements may include a fee for the return or disposal of the vehicle at the end of the lease or finance term. These charges could be deemed excessive if they do not reflect the actual costs incurred by the finance provider in processing the return or disposing of the vehicle.

Affordability and Fair Treatment

If the finance agreement was unaffordable or the consumer wasn’t treated fairly when they were in financial difficulties.

Affordability and fair treatment are central tenets of the Financial Conduct Authority (FCA)’s expectations for firms offering consumer credit, including car finance. When it comes to car finance agreements, firms are required to conduct thorough affordability checks before entering into a contract with a consumer to ensure that the customer can sustainably afford the repayments over the term of the agreement.

If a consumer feels that a car finance provider has not taken proper steps to assess their affordability or has not treated them fairly, particularly when they are in financial hardship, they may have grounds to make a complaint. In the event of such a complaint, the FCA would expect the firm to investigate the circumstances surrounding the affordability assessment and the subsequent treatment of the customer. If it is found that the firm failed in its obligations, the customer may be entitled to redress, which could take the form of compensation, adjustment of the finance terms, or other measures to rectify the situation

In terms of affordability, the FCA stipulates that:

  • Affordability Assessments: Firms must assess the customer’s financial circumstances, including income, expenses, debts, and other financial commitments. The aim is to ascertain whether the customer can afford the car finance repayments without experiencing financial hardship or getting into financial difficulties.

  • Responsible Lending: The principle of responsible lending requires that firms do not enter into a credit agreement if it is apparent that the customer would be unable to make the repayments or would only be able to do so under financial strain.

  • Transparency: Customers should be provided with clear information about the terms of the finance agreement, including the monthly repayments, interest rates, and the total amount payable, enabling them to make informed decisions.

Concerning fair treatment, this encompasses how finance firms interact with customers, especially those who find themselves in financial difficulty. The FCA expects firms to:

  • Treat Customers Fairly (TCF): Firms should demonstrate fairness through all stages of the customer relationship, from advertising and the sales process to dealing with problems or complaints.

  • Managing Financial Difficulty: If a customer is struggling to make payments, firms should work with them to manage their situation. This could involve offering forbearance measures, like payment holidays, reduced payments, or restructuring the agreement to make it more manageable.

  • Communication: Firms are expected to communicate in a clear, compassionate, and respectful manner, particularly when dealing with customers who are experiencing financial distress.

  • Forbearance: When customers are in financial difficulties, firms should consider their circumstances and offer forbearance options that are in the best interest of the customer.

Commission Transparency

If consumers believe that commission was not adequately disclosed or are unhappy with the amount of commission paid from the lender to the broker who arranged their car finance.

Commission transparency in car finance is an area the Financial Conduct Authority (FCA) has been actively working to reform. It refers to the disclosure of any commission, fee, or other remuneration paid to a car dealer or a broker by a finance provider for arranging a car finance agreement with a consumer. The FCA’s focus on commission transparency comes from concerns that certain commission models can lead to conflicts of interest, poor customer outcomes, and a lack of transparency for consumers.

Any customer who feels that they were not made aware of the commission arrangement when entering into a car finance agreement has the right to complain.

If it is found that the customer wasn’t properly informed about the commission, and it potentially affected the impartiality of the advice or the cost of the finance, they may be entitled to redress. This could include a refund of the overpaid interest or other forms of compensation.

The FCA has made clear that it expects finance providers and intermediaries to have systems in place to ensure that commission information is disclosed to customers transparently and that the impact of commission on the cost of finance is clear. Customers should be given sufficient information to understand the implications of commission on their finance agreement and to assess whether the product is right for them in terms of cost and suitability.

Key points related to commission transparency include:

  • Disclosure: Customers must be informed about the existence of commission payments, the nature of the commission arrangement, and how the commission might affect the neutrality of the advice given.

  • Commission Models: Traditional commission models, such as “Difference in Charges” (DiC) or “Variable Rate Commission”, where the broker or dealer has discretion to set or influence the interest rate and thus their commission level, can incentivise sellers to arrange finance at higher rates than might otherwise be available. The FCA has expressed particular concern about these models.

  • Informed Decisions: By ensuring transparency around commission, customers are better positioned to make informed decisions about whether the product is suitable for them and offers good value.

  • Ban on Discretionary Commission Models: The FCA has banned certain types of discretionary commission models (effective since January 2021) to prevent finance brokers and car dealers from increasing their commission by raising the interest rate paid by the customer.

  • Fair Customer Outcomes: The FCA’s rules aim to prevent the use of commission models that could incentivise brokers or dealers to act contrary to customers’ best interests. Firms are expected to act to deliver fair customer outcomes and to manage any potential conflicts of interest effectively.

Making a Car Finance Claim:

Your Options

You have a number of options open to you if you do decide that you are eligible to make a car finance claim. Each of these has it’s own benefits and disadvantages. You should make a decision based on which is the best option for you and your personal circumstances.

The FCA on Car Finance Mis-Selling

The Financial Conduct Authority’s (FCA) position on the mis-selling of car finance reflects its overarching mandate to ensure that financial markets function well, with consumers enjoying a degree of protection and confidence in the financial businesses they use. As part of its regulatory activities, the FCA undertakes reviews of different financial markets, including the car finance market. This is mainly to identify and address any poor practices that could result in consumer harm or loss.

In January 2024, after an initial investigation, the FCA announced a review of the car finance market; focusing on ensuring that consumers who may have been disadvantaged by poor practices receive appropriate compensation. The review targets issues such as misrepresentation of finance products, unaffordable lending, unfair treatment in financial difficulties, and the lack of commission transparency.

One of the central concerns identified is the potential mis-selling of car finance agreements when they are misdescribed or when key terms, like annual mileage allowances, are not clearly communicated to consumers. The FCA is particularly attentive to end-of-agreement charges that consumers are unhappy with, whether due to their magnitude or the lack of prior disclosure.

Another focal point is the issue of affordability. The FCA has repeatedly emphasised that car finance agreements should be affordable for consumers. If a consumer is in financial distress, the FCA expects the finance company to treat them fairly, which entails conducting appropriate affordability checks and offering support when consumers face financial difficulties.

The FCA has zeroed in on the disclosure of commissions paid from the lender to the broker who arranged the car finance. The FCA’s stance is that full transparency is required regarding commissions to ensure that consumers are not influenced by any potential conflicts of interest that could arise from commission-based selling.

To address these issues, the FCA introduced temporary complaint-handling rules relating to certain car finance complaints, particularly where a discretionary commission arrangement was in place. These rules are intended to streamline the handling of complaints for agreements entered into before 28 January 2021, where such commission models were common.

The FCA’s scrutiny of commission payments also led to a ban on discretionary commission models, which took effect from January 2021. This ban was brought in to prevent finance brokers and car dealers from manipulating interest rates to increase their commission, potentially at the expense of the consumer.

The FCA has resolved complaints where it found that commission arrangements between lenders and car dealers were unfairly structured, impacting over 10,000 consumers who believed they were charged too much for their car finance. These decisions are paving the way for how similar unresolved complaints may be addressed.

It seems clear that The FCA is determined to ensure that the car finance market is fair and transparent, protecting consumers from mis-selling and unfair practices. By conducting market reviews, enforcing new regulations, and resolving individual complaints, the FCA aims to ensure that car finance firms act in the best interests of consumers and that those harmed by past practices receive appropriate redress. The FCA’s review and subsequent actions underscore its commitment to uphold the integrity of the financial market and safeguard consumers’ rights.

Other Potential Factors for Mis Sold Car Finance

Car finance mis-selling refers to the unethical and often illegal practice where consumers are provided with inappropriate, misleading, or insufficient information when entering into a car finance agreement. This can result in individuals committing to financial products that are unsuitable for their needs or that they do not fully understand. Mis-selling may occur in various forms within the car finance industry, and it typically involves one or more of the following scenarios:

PCP Claims Timeline

Mis Sold Car Finance Claims Case Studies

The Financial Ombudsman provides several case studies of those who have made claims regarding car finance. In this section, we take a look at some of these case studies.

UK Car Finance Companies

Get familiar with the UK car finance companies landscape through our comprehensive directory, and keep up to date with the latest claims against specific car finance providers in the UK.

We cover a range of providers, giving you a snapshot of the market and the latest news in relation to car finance claims.

Car Finance Statistics

Car Finance Mis-Selling FAQs

Here are some Frequently Asked Questions that you may have:

Car finance mis-selling occurs when a financial product or service related to the financing of a car purchase is sold in a way that is misleading, inappropriate for the customer, or fails to meet regulatory standards for fair treatment. This can include not providing clear information, recommending unsuitable financial products, or not conducting adequate affordability checks.

Reasons for mis-selling may include:

  • Lack of transparency regarding terms, interest rates, and fees.
  • Failure to explain the total cost over the life of the finance agreement.
  • Inadequate affordability assessments.
  • High-pressure sales tactics.
  • Conflict of interest due to undisclosed commission structures.
  • Providing incorrect information about the product or service.

If the finance agreement’s terms, interest rates, fees, and the total amount repayable are not clearly explained or deliberately obscured, customers may not fully understand the financial commitment they are making, which can lead to misinformed decisions and financial harm.

You should first raise a complaint directly with the finance provider. If you are not satisfied with their response, you can escalate your complaint to the Financial Ombudsman Service for further investigation and potential resolution.

Possibly, if it’s proven that you were mis-sold car finance, you may be entitled to compensation. The level and form of redress will depend on your particular circumstances and the nature of the mis-selling.

The FCA has introduced regulations to ban certain commission models, improved rules around affordability checks and transparency, and conducted market reviews to ensure fair treatment of consumers. The FCA also oversees the handling of complaints and can take enforcement action where necessary.

Yes, the FCA has several regulations in place to protect consumers, including the Consumer Credit Act and the FCA’s CONC rules, which require firms to lend responsibly and treat customers fairly.

Generally, you should make a complaint as soon as you realise there might have been mis-selling. There are time limits for complaining to the finance provider and the Financial Ombudsman Service, usually six years from the event or three years from when you became aware (or should have become aware) of the issue.

To avoid mis-selling, always read the terms and conditions carefully, ask for clarification on any points you do not understand, ensure you have a clear breakdown of costs, and don’t feel pressured to make an immediate decision. Additionally, consider getting independent financial advice before agreeing to a finance deal.

Accurate as of 23/1/24

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