What you need to know about the car finance scandal

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Wed, Feb 19, 2025, 11:00 PM 4 min read

How did it come about?

The City watchdog, the Financial Conduct Authority (FCA), started looking into commissions in the motor finance industry in 2017.

The FCA then launched a consultation on the use of discretionary commission arrangements (DCAs) in 2019. DCAs were a type of commission model received by some car retailers and motor finance brokers, which was linked to the interest rate that customers pay.

This meant that the broker could effectively set the interest rate and the FCA said this created an incentive to sell more expensive credit to some customers, acting against their interests.

As a result, the FCA banned DCAs in 2021, a move which it said would save customers £165m a year.

In January 2024, the FCA then launched a review of historical motor finance DCAs, to understand if there was any misconduct related to this type of commission before the 2021 ban. In addition, the review has also sought to understand if consumers have lost out and if so, what the best way would be to ensure they receive appropriate compensation.

However, a Court of Appeal ruling in October broadened the scope of the issue to any car finance commissions. The court found it illegal for dealerships to receive commissions on car finance deals without securing “fully informed consent” from buyers. It is feared that the landmark ruling has paved the way for a multi-billion-pound redress scheme.

Following the ruling, the FCA said in December that was extending the time firms have to respond to complaints not involving DCAs, with a new deadline of 4 December 2025.

The FCA's general counsel Stephen Braviner-Roman told MPs in a Treasury committee hearing in December that the regulator had previously said that "looking at DCAs alone we do not think it is at the scale of PPI."

"That was when we were looking at DCAs alone, so it would be premature to say it is definitely not at the scale of PPI now," he said.

In December, the Supreme Court granted Close Brothers (CBG.L) and South African financial services firm FirstRand (FSR.JO) permission to appeal the October ruling.

The Financial Times reported in January that the Treasury had submitted an application to intervene in the case, saying in a letter that it had the "potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers."

However, the Supreme Court said on Monday that it had refused the Treasury's application to intervene.

The appeals of cases involving Close Brothers (CBG.L) and FirstRand (FSR.JO) are listing for hearings on 1-3 April.

The FCA plans to set out the next steps in its review into DCAs in May, as well as potentially providing an update on non-DCA complaints, but had already warned lenders to keep some money aside to potentially resolve complaints.

Lenders set aside costs

Providers that could be impacted by the launch of compensation scheme have already started to set funds aside.

Close Brothers said last week said it was setting aside up to £165m in the first half of its financial year in relation to potential motor commissions costs.

"There remains significant uncertainty as to the range of outcomes from the motor commissions appeals and the FCA’s ongoing review of motor commissions and, therefore, the ultimate cost to the group could be materially higher or lower than the estimated provision," Close Brothers said.

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In addition to the £700m that Lloyds (LLOY.L) said on Thursday had been set aside for potential costs, the bank – which owns the UK's biggest motor finance provider Black Horse – had already said in February last year that it allocated £450m to put towards possible payouts.

The bank's CEO, Charlie Nunn, warned in December that the UK's consumer finance sector is facing an "investability problem" in the wake of October's landmark court ruling.

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