Millions of British motorists have their sights firmly set on the Financial Conduct Authority (FCA) this year, as its investigation into dealership commission agreements takes centre stage.
The inquiry is set to trigger a wave of compensation claims from motorists who were mis-sold car finance agreements, potentially reshaping the UK’s financial market.
This comes on the heels of a landmark ruling by the Court of Appeal in October 2024, which declared it unlawful for car dealerships to accept undisclosed commissions from lendersโa practice widespread between 2007 and 2021.
With this legal precedent in place, affected consumers now have clearer grounds to seek compensation, putting considerable pressure on lenders and dealerships alike.
What is the PCP scandal
The Personal Contract Purchase (PCP) scandal centres on the mis-selling of car finance agreements, in which consumers were not informed about commissions paid by lenders to brokers or dealers.
Many deals, particularly PCP (Personal Contract Purchase) and HP (Hire Purchase), involved brokers or car dealers arranging finance for consumers through lenders. These brokers and dealers often received undisclosed commissions from lenders for securing these agreements.
The problem? Many of these payments were discretionary, meaning dealers or brokers could adjust the interest rate to increase their own commission. Here’s how it worked:
1. Higher Interest = Higher Commission
Many finance agreements used a “Difference in Charges” (DiC) model, where the commission paid to the broker was linked to the interest rate charged to the consumer. The higher the interest rate, the larger the bonus.
2. Incentive to inflate rates
Because brokers and dealers could influence the interest rate, they had a financial incentive to set it higher than what the consumer would have otherwise qualified for. Instead of offering the best possible deal, they prioritised maximising their own commission.
3. Lack of transparency
Consumers were not told about these commissions or the fact that the interest rate had been inflated to generate additional earnings for the dealer. This lack of disclosure meant people unknowingly paid more than necessary for their car finance.
The FCA launched an investigation into these practices, recognising that consumers may have been overcharged. The regulator banned discretionary commission agreements in January 2021 and is considering a formal redress scheme for affected drivers.
In October 2024, the UK Court of Appeal ruled it unlawful for lenders to pay commissions to car dealers without the borrower’s knowledge, setting a precedent for potential compensation claims.
Anticipated boom in PCP claims in 2025
Experts predict a significant surge in compensation claims this year. This anticipated increase stems from a confluence of regulatory investigations, legal rulings, and governmental interventions. Here are the key points.
- FCA Findings Delayed Until May 2025
The Financial Conduct Authority (FCA) originally planned to publish its findings by September 2024. However, delays in data collection and ongoing legal proceedings have pushed the release to May 2025.
This extended timeline allows more consumers to become aware of potential mis-selling issues and prepare their claims accordingly. Meanwhile, firms now have until 4 December 2025 to provide final responses to complaints.
- Industry Preparations for Rising Claims
In response to the revised timeline, firms are taking steps to handle the anticipated wave of claims:
- Enhancing data collection: Ensuring accurate and accessible historical records for efficient complaint handling.
- Setting aside financial reserves: Preparing for potential compensation payouts to mitigate financial risks.
- Improving consumer communication: Maintaining transparency about investigations and complaint processes to manage expectations.
- Court of Appeal Ruling Expands Consumer Rights
A key Court of Appeal ruling in October 2024 determined that any undisclosed commissionโregardless of its natureโcould render the agreement unlawful. This decision has broadened the scope of potential complaints, opening the door for more consumers to challenge their agreements.
- Financial Impact Could Rival PPI Scandal
Industry analysts warn that the compensation liabilities from mis-sold car finance could be comparable to those seen in the Payment Protection Insurance (PPI) scandal.
Supporting this concern, the Financial Ombudsman Service reported a record number of car loan complaints in the last quarter of 2024โsurpassing credit card-related complaints. This trend reflects rising consumer awareness and an increasing willingness to seek redress.
- Supreme Court Appeal in April 2025
A crucial Supreme Court hearing in April 2025 is expected to provide definitive legal clarity on commission practices. If the judiciary upholds the previous ruling, it will strengthen the grounds for consumers to claim compensation.
- Governmentโs Failed Intervention
In February 2025, the UK Supreme Court rejected an attempt by Chancellor Rachel Reeves to intervene. The Chancellor raised concerns over the financial impact of widespread compensation claims, warning of potential instability in the motor finance industry.
The Supreme Courtโs refusal to allow government intervention signals a strong commitment to legal principles over economic concerns, leaving the path open for consumers to seek redress.
A defining moment
As 2025 unfolds, the FCA’s investigation and ongoing legal battles are set to define the future of the car finance industry. With regulatory scrutiny intensifying and legal precedents favouring consumers, the surge in PCP claims could reshape financial accountability in the motor industry.
Whether lenders and dealerships can withstand the financial repercussions remains to be seen, but one thing is clear: the fight for compensation has begun.
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