The UK Car Finance Scandal: Its Impact on Drivers and the Industry

The UK’s car finance industry is facing a major scandal, with millions of drivers potentially owed compensation due to unfair lending practices. At the heart of this issue are Discretionary Commission Arrangements (DCAs) and hidden commissions, which potentially resulted in consumers unknowingly paying higher interest rates on their car finance deals. The scale of this controversy could rival the PPI (Payment Protection Insurance) scandal, which cost UK lenders billions in compensation.

With a wave of legal challenges and regulatory scrutiny, consumers can benefit from finding out how they may have been affected and if they can get compensation from a car finance claim.

What Are DCAs and Hidden Commissions?

Discretionary Commission Arrangements (DCAs)

DCAs were a common practice in the UK’s car finance industry before they were banned in 2021 by the Financial Conduct Authority (FCA). Under these arrangements, lenders allowed car dealerships and brokers to set the interest rates on finance agreements. The higher the interest rate they charged the customer, the more commission they earned from the lender. This created a clear conflict of interest, as dealers had an incentive to increase interest rates instead of offering the best deal to the consumer.

For example, a dealer might have been able to offer a finance agreement at a 5% interest rate but instead set it at 9%, because the extra 4% meant more commission for them. Most consumers had no idea that this was happening.

Hidden Commissions

A separate but related issue is the lack of transparency about commissions. Many car finance agreements included a clause stating that a commission “may be received” by the dealer, but the actual amount and impact on the loan were not clearly disclosed. It is argued that this meant that customers had no way of knowing how much extra they were paying purely to fund commissions.

Even though FCA rules require businesses to disclose commission arrangements when they could impact a customer’s decision, there were no clear instructions from the FCA on what counted as disclosure, and cases were going to court debating this point. 

FCA Ban and Legal Action

Recognising how unfair these practices were, the FCA banned DCAs in January 2021. This meant that car dealers and brokers could no longer increase interest rates to boost their commissions. However, the ban did not retroactively compensate consumers who had been affected by these practices before the rule change. As a result, consumers can claim back for these commissions if they were used on their car loan.

The legal fight took a major turn in October 2024, when the Court of Appeal ruled that undisclosed commissions were unlawful. The ruling confirmed that lenders must have clearly informed customers about commission payments and how they affected loan costs. Many finance agreements did not meet this standard, meaning affected consumers may now be entitled to claim compensation.

The Supreme Court is expected to hear an appeal on the matter in March 2025, which could set further legal precedents on how compensation claims will be handled. Rachel Reeves recently got involved, asking the Supreme Court to ensure compensation was proportional to their actual financial losses, over fears that spiralling claims would impact the availability of car loans.

How Much Compensation Could Be Paid Out?

Industry experts estimate that, if the recent court decision is upheld in full, car finance lenders may face £30 billion in compensation claims, with millions of people affected. Even without the recent court ruling, about half of this would be from DCA’s, which will definitely go ahead.

Major lenders, including Barclays and Lloyds, have already set aside significant funds in anticipation of potential payouts.

Some claim this could be one of the biggest financial scandals since the PPI mis-selling scandal, which resulted in over £38 billion being refunded to consumers.

How to Check If You’re Owed Money

If you took out a car finance agreement before January 28, 2021, you may have been affected by hidden commissions or discretionary commission arrangements. Here’s what you can do:

1. Check Your Finance Agreement – Look for any mention of commissions or discretionary interest rate setting. If it’s unclear, you may have a case.
2. Contact Your Lender – Ask for a full breakdown of your loan, including commission payments.
3. File a Complaint – If you believe you were misled, you can file a complaint directly with the lender. If they reject your claim, you can escalate it to the Financial Ombudsman Service (FOS).
4. Alternatively, Claims Management Company – Some law firms and claims companies specialise in car finance compensation. However, be aware that they often charge a percentage of any payout you receive.

There are numerous comprehensive guides available that can walk you through every step of the car finance claims process.

The Future of the Car Finance Scandal

This issue is far from over. As legal cases progress, more consumers are expected to come forward with claims. The FCA may introduce further regulations to prevent future mis-selling scandals, and lenders could face additional financial penalties.

For now, UK drivers should review their car finance agreements, take action if they believe they were misled, and stay informed about ongoing legal developments. With billions potentially at stake, the car finance compensation scandal could reshape the industry and deliver justice to millions of affected consumers.