Have you been mis-sold a car loan? Probably not

You would be hard put to find a doughtier defender of British consumerdom than me. I don’t flinch from returning things that don’t work or don’t fit. I have successfully challenged supermarket bills as well as a fine for driving down a poorly signposted low traffic neighbourhood. So I’m no shrinking violet when it comes to consumer rights.

Even for me, though, there comes a point where the buyer has to bear some responsibility. And that that point is reached with the cash cow of the hour – historical car loans. As of a court judgment last month, the position is this: if you bought a car from a dealer with a loan between 2007 and 2021, you may find a bonus, or even a cancellation of the loan, winging your way in the form of ‘redress’. The average car owner who borrowed to buy could be in line for more than £500 plus interest. Banks, finance companies, brokers and car dealers, meanwhile, could be on the hook for a total of £13 billion.

Earlier this year, the Financial Conduct Authority (FCA), opened an investigation into car loans taken out in those 14 years in response to a clutch of complaints. It was looking specifically into so-called discretionary loans, where the dealer could vary the interest rate and earn a higher commission from the financier for agreeing a higher rate with the borrower. With the investigation in train, three test cases were brought to separate county courts, claiming unfair practice. The argument was that discretionary commission arrangements, as they were known, which were rarely disclosed, gave dealers an incentive to push up the interest rates, so stacking the cards against the consumer. All the test cases failed.

Which is where I submit things should have been left. After all, if there had been a problem, it had long been solved. The FCA introduced new rules in 2021 that outlawed this sort of commission and required the disclosure not just of any payment but of the actual amount. Anyone not doing that put themselves on the wrong side of the law.

Unfortunately, this is not where it was left. The three cases were joined and taken off to appeal, where the court, to almost universal surprise, not only found in their favour but broadened the remit. It now covers not just loans subject to discretionary commissions but other loans, too. The loan companies, which include the finance arms of VW and other big car makers, calculate that their bill for redress could run into billions of pounds. Their shares slipped accordingly, and some suspended new loans.

Which is where I want not just to draw a thick black line, but to ask a few questions. Were the loan rates under this system competitive? Was the convenience of a loan through the dealership a consideration, against the hassle of going to a bank? Were customers able to haggle over the loan terms, as well as the price of the car? Above all, though, did not knowing about the existence of a dealer’s commission place customers at any serious disadvantage? If they had known, would they have flounced out and gone elsewhere? Or did they perhaps assume that some commission was paid somewhere along the line, as it often is in such deals? It has also to be said that discretionary rates could work to the customer’s advantage. Dealers under pressure to meet a target could offer the customer a cheaper rate.

The old system was of its time. In some cases, the existence of a dealer’s commission from the finance company was disclosed in the small print, in other cases not at all. The rules have now changed, and everything must be spelled out. But why on earth should car buyers who took out loans before the rule change qualify for redress?

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At least part of the problem may have to do with a consumer culture primed by the so-called scandal of PPI, which bears certain similarities to the car loans. Payment Protection Insurance was designed to repay or help make payments towards loans in the event of some misfortune befalling the borrower, and the scandal concerned claims that banks had mis-sold these policies to people who did not know they could refuse them or who were not eligible for pay-outs for whatever reason.

You can see why lenders liked it – and they liked it even more because it came with commission (for them). But the sluice gates were opened in 2011 when the Supreme Court ruled that the banks had misbehaved, allowing claims for mis-selling to flood in. By August 2019, when the claims window closed, hundreds of thousands of claims had been met, at a total cost to the banks of more than £50 billion – that is £700 per resident of the UK at the time.

And guess who, in the end, paid, and may still be paying? Without doubt, you and me, but especially those of us who had, whether by luck or judgment, managed to avoid PPI. We were subject to the higher prices, higher interest rates and higher everything that the massive compensation payments surely helped to cause. But unlike the PPI crowd, we received no compensation. According to some estimates, PPI kept the UK economy buzzing, as beneficiaries splashed out on new cars and holidays with their unexpected gains.

The rights and wrongs of PPI, to me, are finely balanced, making for a marginal judgment call. But should it really have become this mega-scandal? Pressure selling, sleight of hand, outright deception – there were elements of all these. But maybe we should also have heard a bit more from those who benefited from a PPI policy doing the job it was designed to do, whether they had taken it out wittingly or not.

In the meantime, it seems to me, there is plenty of mis-selling still going on quite openly today, which is subject to no scrutiny whatever, still less offering any prospect of compensation. How hard should it be to avoid signing up to Amazon Prime? How come a lender such as Klarna has become the nearly default payment mechanism for so many internet transactions? And what of the proliferation of demands for charitable contributions, when all you want is to book an actual ticket to a theatre or gallery?

Simplicity and transparency go hand in hand, and those traders who set out to deceive must pay the price. But stinging the financiers of car loans for practices that were at the time both widespread and legal risks spoiling the market for everyone. If allowed, it’ll raise the price of financing a car purchase and limiting choice. Happily, the disputing parties are on their way to the Supreme Court.