Car finance mis-selling scandal: you could be owed hundreds of pounds

James Rowe: At the end of the month, the FCA, the Financial Conduct Authority, will lay out its rules for a multibillion-pound compensation scheme aimed at millions of drivers who unwittingly overpaid when they bought a car on finance. But what will those rules look like, and how can you be sure you're getting a good deal when you buy a car on finance in the future? Welcome to Which? Money.

Hello, it's James Rowe in the Which? studio this week and alongside me I've got from our cars team, Michael Passingham. Michael, hello.

Michael Passingham: Hi.

James Rowe: How are you?

Michael Passingham: I'm great, thank you.

James Rowe: Very good. And joining us for the very first time is Pat Hoy, founder of Inside Car Deals. Pat, hello.

Pat Hoy: Hi there, nice to meet you both.

James Rowe: Likewise. You've done some work with Which? before, but it's your first time on the podcast. Now, I mentioned in the intro about the FCA and this big report they're doing into the misselling of car finance. If I paint a bit of a picture and then Pat, I wonder if you could flesh it out a little bit. Because on the surface of it, what we're looking at here is in the past when people have been buying a car on finance arranged by a dealer, the lender has often been paying the dealer commission for when the loan is arranged, but it has not always been made clear to the customer that that's been going on and they may have been paying a bit more than they should have done.

Pat Hoy: Sadly not. That is the crux of the problem. It came about because the dealer could buy the finance at a wholesale price and the lender then said, "Look, you can raise this by up to usually five percentage points, and that difference is the commission we'll pay you." So most dealers, being dealers, would try to go for the 5% spread if they could. That was able to generate large amounts of finance commission for them, but the customer had no idea this was going on.

So I think what the FCA has done is right, and there should be redress for those customers. It has been banned now since 2021 and is not really been a problem in the new car market in the last probably 10 years, because most of that finance is manufacturer led and it's designed to be low rate APRs to try to encourage people in. But even so, I know from the research we do that if you buy a low rate finance contract from a major manufacturer, they quite often will still pay up to £1,000 to the dealer as a documentation fee. But as long as the customer is aware of what the process is and how much the dealer is earning, then that's fine.

James Rowe: And as you say, the rules have been changed in recent years, but this time span takes us all the way back to 2007, which is when it's been happening for. And the FCA, they say that a lot of these firms simply broke the rules because it was unfair and unlawful, because they simply didn't tell consumers what was going on behind the scenes. That's right isn't it, Michael?

Michael Passingham: Yeah, and the brokers were supposed to be — so the broker being the dealer in this case — were supposed to be acting in the customer's interests when it came to the finance side of things. But in those cases they clearly weren't, because they were encouraged to drive up the interest rate specifically for commission purposes, which is not to the advantage of the consumer. Under finance rules you can't do that. So it's right that it's been stamped out and it's nice to see that the compensation scheme is finally picking up some speed.

James Rowe: And when we say there's a lot of drivers who could be impacted or a lot of car buyers, I said millions, and it is millions because a lot of us do buy cars on finance rather than paying outright, don't we?

Michael Passingham: Yeah, the vast majority of new cars are bought on finance and the FCA says around 44% of agreements made since 2007 were unfair and, on average, people could be owed about £700, but obviously it depends on the agreement that you signed. So it's absolutely worth if you haven't already looked into it, it's time to now look into whether you're owed money.

You don't need to go through a third party claims firm. I'll tell you that immediately because all of that is going to be arranged and dealt with by the finance companies and the FCA. So you just simply need to go to the FCA's website, type in a few details, find out some of what you bought and when, find out who the finance provider was, and then the process should happen automatically for you.

James Rowe: Yeah, some people have dubbed this one of the biggest scandals since PPI and we were bombarded with adverts about PPI claims companies – but just to reiterate, this is not something you need to do, you can you would end up paying a fee I would imagine, you can do this on your own.

Michael Passingham: Exactly, yes. Third parties coming in, they claim to be able to find stuff that you wouldn't be able to find, but as far as we're aware, this is all stuff that is easy to locate and it will be dealt with for you.

Pat Hoy: Has it also been said that the onus is on some of the lenders to reach out themselves to self-regulate? But how do you feel that will go?

Michael Passingham: I think that probably to rebuild some trust they should, they probably would like to be doing that because I'm sure the FCA will be keeping a close eye on who behaved best in this regard. But yes, I would hope that if there's clear evidence and there's a clear database of, "Okay, we did sell a bunch of these deals," hopefully they'll be able to reach out to the people who originally bought those deals.

James Rowe: I think trust is the right word though there, isn't it, Pat? Because it was the provider who lends you the money in the first place and then something has gone wrong in that. Obviously, as a consumer you will feel the bond of trust has been broken there, but then the onus is on that provider to double check that you are owed money, so you do have to build that trust back up as well, don't you?

Pat Hoy: You do. What used to go on in car showrooms, and I know this because I saw it happening, is that the other factor with this is that people's credit ratings will vary. Typically, a lender will price risk accordingly, and that's not outlawed by the FCA. So if a lender decides you're higher risk, they can increase the APR but not pay any more commission.

But what salespeople were doing is they were inferring to customers that their credit rating might not be that great and that's why they should have this higher rate in order to help them get accepted by the finance company. So there was that kind of malpractice which went on, which again is just wrong. These companies would know the base rate they gave to dealers in this time period and they should be able to look back and see what the typical spread was. If a finance lender sees that their typical spread was 1.5%, then okay, that's fair enough. But if the typical spread was 5%, that's where you need to confess up and say, "I owe some money."

James Rowe: And you said you've seen this kind of stuff going on. Have you seen any horror stories for certain consumers where you just look and think, "My goodness, that is hugely inflated?"

Pat Hoy: I can give you an example. I won't name the company because obviously I can't do that on air. But what this company did was they tried to create their own version of a PCP deal whereby you have a balloon payment offset, which lowers the monthly payments throughout. The way they tried to do that was to sell a car at the highest interest rate possible, which would generate £4,000 or £5,000 finance commission. They would then take that commission and subsidise the first half of a four-year agreement.

So for the first two years the payment would be £200 a month. If you carried it forward, it would be £400 a month. But the idea was to settle it after two years and make it look like a PCP. But because the interest rate was so high, when you came to the early settlement fee or charges after two years, halfway through, it was horrendous. So people were coming back to the dealership after two years wanting to undertake this process and finding they owed so much on the finance it didn't cover what their car was worth. So they then had to refinance even more in order to get out of that deal. It was things like that which would go on. I'm not saying every dealer would behave this way, but the ones that were minded to were given all the tools they needed to do it.

Michael Passingham: That's absolutely shocking. And for me it's like, something that was ingrained in the industry not all that long ago. How can we trust that this isn't going on in some other form aside from I guess the FCA stamping down on it? Because if I go to a dealership now, what should I look out for to avoid falling into another trap that might be laid for me?

Pat Hoy: There are two spin-offs from this which I know the FCA have got it on their radar to look at. This tends to apply more to the used car market, because the majority of new is now so tied up with manufacturer finance, these things don't happen.

But what the FCA are keeping their eye on with the used market is two things. One is called steering, which is where if a dealer decides to pick a lender who charges a higher APR and therefore a higher commission, he will go with them rather than another lender who might offer a lower APR and a lower commission. And all the deals they do, they'll try to steer into that route. What that allows dealers to do potentially is be seen in their local marketplace to be more competitive on the price of the car to draw people in, but then the finance side of things is higher than it could be. When you look at say the additional £500 or £1,000 commission they're making, spread over a four-year finance term, it doesn't look as bad.

Steering is one thing they're looking at, and the second thing is the fact that if a dealer's commission is based on a percentage of the loan amount, it's in the dealer's interest to make that loan amount as high as possible, which means they can encourage low deposits. They can encourage you buying Autoglym or other add-on products which you don't really need, but it's only a fiver a month. So again, if a customer decides to buy a bunch of stuff and finance it, that's up to them. But if the dealers are actively doing this as a policy, that is not great for the consumer.

James Rowe: I feel like we're opening another can of worms here. The misselling is a huge scandal to begin with, but are we opening another can of worms with everything else that's going on?

Michael Passingham: I guess it's the balancing of the free market versus what when you're working with finance, which is a rightfully tightly controlled industry, how you balance those two things. People having free will to buy what they want to buy for the price they want to buy it at versus being steered. Obviously, I would probably go more towards the make sure it's all up front and people understand what they're getting into, but I guess you can't expect the average consumer, the average car buyer to understand these things and to know what to look out for or even if they might have no idea why they're being encouraged to save money at one part of the deal – like a lower deposit for example – because the deposit on a PCP deal for example can be fairly high, a few thousand pounds, and if you can save money on that, that's obviously a good entry point and allows you to get the car you want. But you need to fully understand that that will result in a larger loan and possibly higher interest rates and higher costs long-term. So yes, it's just a case of going into a dealership I guess with a checklist of things to make sure that you're not falling into the trap for which, just hearing what you're saying, I'm kind of aghast at the number of things I would have to think about going in there.

Pat Hoy: Because I said this applies more to the used car marketplace, it's even more critical for consumers to know what's going on because used cars are unique. You can't find the same car down the road or the one you see in Reading, the same one in London. So if you like that car, that dealer's selling it and that's the finance deal, the pull to get the deal done is so strong. I guess the only thing you can do is organizations like Which? can include this information in the advice you publish and encourage people to read it, because the more they know, the less chance there is they're going to get ripped off.

James Rowe: And I think it's probably a good time to get some listeners up to speed, perhaps those who have not bought a car on finance before, are going to do it in the future, or just are a bit all over the place with some of the names and abbreviations. The pair of you've both mentioned PCP already. What's that and do you want to give us a bit of background on what it is and why you might choose it?

Michael Passingham: So it's Personal Contract Purchase. You are effectively making an initial deposit on a car and then you're paying monthly for that car including interest over between two to five years. At the end of that deal, you then have the option of buying the car outright with what's called a balloon payment, and that's a payment that will have been agreed at the start of the contract. Also you are limited, you don't actually own the car until you, if you choose to buy it at the end of the contract, you don't own the car so you're responsible for things like — or you will be on the hook for things like — damage and if you go over your pre-agreed mileage limit, you will pay extra again for every mile you drive over the limit for each year.

So obviously it's the easiest way to get lower monthly payments on the car, the exact car that you want, especially if you want to buy new. But yeah, it does mean that you are going to be paying interest and if you do want to keep the car forever, you would have to pay at the end of that deal as well, or hand it back and then trade that in for a new one.

James Rowe: So it's a case of balancing those pros and cons isn't it? And it's also the most popular type of car finance available?

Pat Hoy: It is far and away. I mean, it's something like about 80 odd percent or 83% of cars are financed, and of that, about 85% is PCP.

James Rowe: And the other types, just should we briefly touch on those and what they are?

Pat Hoy: You have Hire Purchase, which is where you literally just pay the whole amount off. PCP is a version of Hire Purchase, so you must understand that if you're thinking about early settlement, the same rules apply. You also have leasing, which is about 5% or 6% of the market, and then you've got about 8% of people who just pay cash.

But PCP is far and away the most popular. It was brought in quite simply to make new cars look more affordable. And what they were supposed to do was the balloon payment Michael was talking about was kind of supposed to be set at around 90% of the car's expected future value at the time. So you can hand your car back or sell it and have 10% deposit to roll onto your next car. And if that works, it just goes along smoothly.

But because of competition, some manufacturers decide that they are going to push that final payment, that balloon payment higher, which makes the monthly payment look more competitive now. So when people are competing for business like in this current March plate, you'll find that a monthly payment can drop by £10, £15 a month. Now what that means is at the end of that PCP contract, although the amount you owe is guaranteed to be at that value, you might not have any deposit for your next car.

James Rowe: And it's interesting that it's kind of cyclical, the 26 plate that just launched on the first of March encourages a great deal of competition. So it is actually a good time to buy a car. And is it that you will find the best or the biggest discounts on those PCP deals versus buying in cash, especially around this time of year or does it really depend on the brand and the dealer?

Pat Hoy: Typically, the total amount of discount you can get on a new car comprises roughly a third from the dealer margin discount — sometimes three quarters — and a third to a quarter from the manufacturer. So a manufacturer might be offering a PCP deal with, I don't know, a 3.9% APR, which is competitive in today's marketplace, and they might be backing that up with a £2,000 contribution towards your deposit. So those sorts of deals are commonplace. Yes, they tick up at March and they tick up in September, but there's also the rest of the year they still want to sell cars. But yeah, it's worth looking in March time because there's also a lot of stock cars around and the deals on these stock cars tend to get better as well.

Michael Passingham: Stock cars being cars that have been pre-configured and pre-bought by the dealer and then out on the forecourt. There's no customisations you can make, but it's there and you'll get some great discounts on it versus buying it customised new straight from the manufacturer.

James Rowe: And we've got another podcast coming out soon about cheap first cars for people and kind of how they're becoming a bit more expensive because of these kind of package deals of optional extras. Do you want to give us a bit of a tease? I know it comes out next week.

Michael Passingham: Yeah, so yeah, this is a podcast that we've recorded about why has the cheap and cheerful car disappeared and what are the factors that contribute towards that. And one of the things is that people are specking up their cars because of finance deals. They feel like they're more able to buy all those extras and that means when those cars come back onto the market they're higher-end cars and the fact that that car is a higher end is reflected in the price, which means the price of used cars is pretty much in lockstep with the price and the increasing price of new cars.

Pat Hoy: The small entry-level cars I think you're alluding to for people are the least profitable for the manufacturers. So over recent years with the attention going to producing electric cars, manufacturers have kind of ditched a lot of their small entry-level cars to focus resources on electric. And what that means is entry-level cars are now typically starting at list price level at about £17,000. So by the time people speck it up, you're up to £19,000. So the used car market in three or four years' time is going to be super tough for first-time buyers.

James Rowe: And it's a fascinating story as a whole which you wrote for the new issue of the magazine, but as I say, it's also available on your podcast apps, it's coming out next week. So be sure to keep an eye out for that one. Pat, should we go back to people who are looking for a new car, looking for a new deal as well when they're paying for car finance? You mentioned something before that I want to touch on about how this old process that the FCA are looking into, this has been banned and doesn't happen anymore, and this is because the deals are manufacturer backed or come from manufacturers.

Pat Hoy: Manufacturers decided to take part of the sales process into their own hands in terms of how competitive they want to see. And what that means is a manufacturer can vary the APR, they can vary the incentive that goes with that deal depending on what they want to achieve in the marketplace. And once a number of manufacturers started to do that, obviously everybody follows suit. So I think you can probably safely say that the vast majority of new car finance deals are manufacturer backed deals. And that means that there's no risk of any foul play because no manufacturer is going to be held up to account for the sort of things the FCA's been investigating.

And it does mean there are some very good deals around. But there are also an awful lot of cars on sale and to kind of know which is the best deal is tough for consumers. The other potential downside of this is that if a manufacturer is offering £2,000 towards your finance deposit, what dealers tend to do is infer that that is the discount. So you go and say, "I want a discount on this car please," they'll say, "Yeah, we can give you £2,000." But that's the manufacturer's discount, not the dealer's discount. Now, most people when they hear about they're going to get a £2,000 discount are quite happy. Why would they try to go further? Because they don't know, do they? And I spoke to a guy last week who bought a new car with this £2,000 discount and I said to him, "That's great. What dealer discount did you get?" He went, "What do you mean? I got £2,000." I said, "But on the car you've bought, you could have got another £1,800 discount." He went, "Could I?"

James Rowe: But I guess a lot of consumers don't know that or maybe even are just a bit too polite and British and don't want to push themselves. Is that fair to say?

Pat Hoy: Car salespeople sell cars every day, people buy cars once every three or four years. So why would you know? And why would you have the skill set to be able to negotiate? Because where else in this country do you negotiate a price?

James Rowe: I guess that's right, isn't it? We don't negotiate on anything else. We almost get encouraged to do with cars because they're such a big purchase, but for literally anything else, you're not going to ask a shopkeeper to take a fiver off the list price of anything else, are you?

Michael Passingham: Yeah, and when I last bought a car a few years ago I was — I was horrible — because I really — there was specific — the power was in their hands because the model, the specific spec I wanted of this used car, it was only coming up every so often and I was like, "I want this car." So I was — I probably should have saved a bunch more. So yeah, I think the next time I might just bring you along with me, I'll buy you lunch first, okay?

Pat Hoy: Buying a car's a very emotional purchase and once a person or a family see the car — what salespeople tend to do if they're any good is they take you on a test drive and they'll take you to your house and park the car in your driveway. Because then you get the visualization of, "Ooh." So once that emotional attachment is there, how seriously do you really want to be difficult and haggle? If it sounds okay, yeah, we'll do it.

James Rowe: Do you know, I've seen some videos lately of some other tactics by car salespeople where they'll if you ask to take it on a test drive, they'll deliberately move the seat really far forward, move the mirror so that when you get in you almost end up adjusting it and it feels like it's your car. They have some of these tactics that they try and deliver to try and make you get attached to the car quicker, right?

Pat Hoy: Yeah, I mean and why not? If I'm selling a car, I want you to fall in love with it. And I don't see anything wrong with that. But I think what it means is it kind of lowers people's defences. And if a deal kind of looks good enough, yeah, we'll do it. The other thing is what we used to find is that especially when you get a family buying a car, you might get one partner leading the negotiation, the other one not. And nobody wants to try to do something and then get knocked back and look a bit silly. So quite often people accept something which isn't the best they could get because they don't want to look silly in front of their partner. And it's things like that which again salespeople won't argue with that.

Michael Passingham: It's like human psychology and I guess this all sort of cycles back to the car finance misselling side of things is that you just want to get it done. Once you're at the point where you're looking at the finance, you're pretty far down the purchase funnel as you put it. So yeah, it's like I don't want to go back and have to ask more questions, just the price looks good enough, it looks fine, let's just get it done.

Pat Hoy: Exactly. I was just making a comparison here with holidays. Because a friend of mine's recently started up as a holiday travel consultant and the discounts you can get on holidays are unbelievable, which I didn't know about. So again, most people have that emotional attachment to a holiday and the same thing will apply. Oh let's just let's just get it done.

James Rowe: It's the fear of the price going up or somebody else snapping up that holiday space or even the car. A salesperson might say, "Oh I've got somebody else interested in this, they're coming back later today," and it's almost — I don't want to use the term pressure tactic — I guess it is a pressure tactic in a way though is it, to try and seal that deal is it?

Pat Hoy: But then again, if you look on Amazon, every time you go on it there'll be something a deal running out tomorrow or you know what I mean? So it's the world over. But it comes down to transparency. The FCA has dealt with it rightly so on the finance side of things and people now know — or I mean a dealer doesn't have to tell you what their terms are or what their commission is, but if you ask them, they have to tell you. Okay? Go to a dealer now and ask them what their total profit is in the car. Are they going to tell you that? No. And how are you going to find out what it is? That's the issue I think, and that's what I try to solve for people.

James Rowe: So how do people get a good deal then? If they're buying used or new and probably buying on finance as you said the stats before Michael most of us are, how can you get a good deal? How do you know you're getting a good deal?

Pat Hoy: It's a real blind spot of the difference between the on-the-road price and a fair transaction price. And there are two numbers people need to know before they go buy a car, new car. One is what is a transaction price that I can expect to pay for this car? And secondly, what should my monthly payments on the PCP look like?

Now, you could do that a number of ways. You could spend your time contacting 10 dealers, asking them for a quote and seeing and comparing what they tell you. And that will give you a range. But even that range is based upon what the dealers want to tell you. You could go online to various online car selling places and they will all give you a quote. But those quotes exist on the basis of the dealers paying a commission to whoever's promoting it to receive the lead that then gets generated. So is that independent, unbiased? Not so sure.

What I tend to do or what I do is I mystery shop dealers and I find out what they will really go to on the price. I then take that information and produce a list of car prices which are realistic transaction prices. I then convert that into a PCP payment using each manufacturer's own data and own terms. So I can say to you if you're going to buy a car James, you need to pay £20,200 for it and it's going to cost you £250 a month. If the dealer does that deal for you, you got a great deal. And it just gives people something to anchor their negotiations with, I believe. What it also does, it doesn't it leaves the dealer with sufficient profit margin to be able to offer a good service. Because we don't want to take away the ability for dealers to offer a good service, do we?

James Rowe: Do you know, I think in a way I almost find it remarkable that you can have a business out of this. Do you know where I'm coming from with this? Because with everything else in life that you buy typically it's a fairly straightforward transaction but in the car industry it's not, is it Michael?

Michael Passingham: And I guess a premium extra service is worthwhile if money can be saved, right? But yes, it is like it's almost like having I don't know going on Location, Location, Location with Phil and Kirstie hand holding your way through making sure you get the right price. And it absolutely, that kind of advice makes a lot of sense on high purchase price items like houses or cars in this case. But yeah, I mean I think yeah, it reflects what you said before is that you only buy a car every few years and you're going to come in fresh every time, the world's changed, the car industry's changed and you yeah, you need a bit of extra help along the way to get the best deal, especially if you're spending a lot of money.

Pat Hoy: And the average discount across all new cars currently is just over £5,800. That's the average. And that's something like about 11.2% discount. I think for electric cars it's up to £7,600. So what I would ask people is how much of that money are you claiming for yourself? And that being an average means for some cars there's an awful lot more, for other cars it can be zero. But you just need a little bit of help to find out what's right for you.

James Rowe: And Pat anything else that you want to add on all of this? Appreciate it's a bit of a minefield.

Pat Hoy: Yeah, I mean I want to make it clear that the FCA's done the right thing to outlaw this wholesaling and retailing of APRs and charging people unnecessary money. But a similar thing happens with the actual profit margin in the car. The dealer buys it for a wholesale price and they sell it for a retail price, and they try to make that retail price as high as possible to maximise their own profit margin. So although this is not under the FCA's remit, I think attention does need to focus on people finding out exactly what they should expect to pay to create a fair deal for them and a fair deal for the dealer.

James Rowe: It is yet another thing to keep an eye on, but you've given us some brilliant advice about what to look for and how to find a really good deal. Before we go, Michael, can we just have a quick another moment on the scandal and for people who think they may have been impacted, just do you want to just give us some of the headlines again? So who might have impacted when and how they go about looking for any compensation that they might be owed?

Michael Passingham: Yeah, so in the first instance, before everything kicks off with the compensation scheme, you should find out who your lender was and complain to them. The FCA has some template letters for you on that and they then have to go look at your complaint and they then have to redress if it is found that you were missold or you your dealer was being underhand perhaps.

James Rowe: Breaking the rules.

Michael Passingham: Yeah, exactly. So and then if you don't get what you want from there you can go to the Financial Ombudsman to take the complaint further.

James Rowe: Very good. And having read the FCA website, it can be good to get in earlier rather than later with trying to complain because it might put you towards the head of the queue. So if you complain before the compensation scheme begins, the lender has three months to get back to you with what you're owed and then pay you within one month of you accepting the offer. And if you complain after the scheme begins later this year, lenders will get in touch with you within six months of the scheme starting, you join the scheme, and then again you'll find out what you're owed within three months of you joining that scheme and then you'll get paid within one month.

So it does pay to, if you want the money sooner, definitely worth looking into it now, but otherwise you will or you should be contacted by the lender to find out what you're owed. And the FCA has plenty of information on that on their website and we'll pop a link to that in the show notes. But for now, Michael at least for this week, you'll be on the podcast again next week, but for today thanks very much.

Michael Passingham: Thanks James.

James Rowe: And Pat Hoy, thanks very much as well.

Pat Hoy: No problem, thank you very much.