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Car finance complaints widened to cover leasing deals, giving lenders more time to respond

December 20, 2024

Lenders in the motor finance market have been granted additional time to address a looming surge in complaints, as the City regulator moves to widen the scope of claims and include leasing agreements.

The Financial Conduct Authority (FCA) has set a new deadline of December 4, 2025 for lenders to respond to customer grievances relating to both discretionary and non-discretionary commission arrangements. Importantly, the complaints process now covers not just traditional car finance credit agreements but also car leasing deals.

This move by the FCA follows a pivotal Court of Appeal decision in October. The court ruled that car dealers receiving commission from lenders without the customer’s informed consent was unlawful, expanding the potential scope of claims for compensation. Previously, the focus had been on discretionary commissions linked to interest rates on finance agreements—a practice that was banned in 2021. Now, the issue may affect all loan commissions that were not properly disclosed, magnifying the industry’s exposure to redress claims.

According to the FCA, the Court of Appeal’s ruling does not directly cover leasing, but the regulator has decided to include such agreements in the complaints process to ensure that consumers using similar products have consistent protection and redress. “Consumers also use leasing to access motor vehicles and it is important that consumers using similar products for similar purposes are treated in the same way,” the FCA said in a statement.

The FCA had already signalled in January that it was investigating the practice of discretionary commission arrangements in motor finance. Such arrangements allowed dealers to earn commissions based on the interest rate they charged customers, potentially leading to higher borrowing costs. These deals were banned from 2021, but legacy loans made before that date remain under scrutiny.

From 2007 until the end of 2020, about 14.6 million car finance agreements included these discretionary commissions, the FCA notes. The more recent legal ruling broadens the scope beyond these arrangements, potentially adding up to 11.3 million additional loans into the pool of claims. Customers who were charged undisclosed commissions may now be entitled to compensation.

This expanded liability could prove costly. The credit rating agency Moody’s has previously estimated that if the Court of Appeal’s ruling is upheld, redress costs could total as much as £30 billion. Although a Supreme Court appeal on the matter is pending, the FCA expects a substantial rise in complaints regardless. Such a figure would bring the motor finance case closer in scale to the notorious payment protection insurance (PPI) scandal, which ultimately cost UK financial institutions around £50 billion in compensation.

While major banks like Lloyds, Barclays, and Santander UK may have the balance sheet strength to absorb these potential costs, smaller and more specialised lenders face tougher prospects. Moody’s warns that mid-sized finance providers, including Close Brothers, Aldermore, Investec, and captive finance arms of car manufacturers like Ford and Volkswagen, could face “a more significant hit to earnings and capitalisation.”

The FCA’s move to broaden the complaints process and provide lenders with a December 2025 response deadline is intended to ensure that consumers have a consistent and straightforward path to redress, while giving the industry time to adjust. As the sector braces for a wave of claims, all eyes will be on the Supreme Court’s decision and any further clarifications from regulators on how best to manage this potentially costly new chapter in car finance redress.