Mis-sold PCP car finance investigation: Key questions answered

The Financial Conduct Authority (FCA) has launched a landmark investigation into personal contract purchase (PCP) car loans. The regulator is concerned customers who took out PCP and HP agreements between 2007 and 2021 might have been overcharged.

Large finance companies such as Lloyds’ Black Horse division are putting aside millions of pounds, with the FCA confirming that it will make sure compensation is awarded in “an orderly, consistent way”.

Here’s all your key questions answered.

What exactly is the FCA investigating?

The FCA is investigating the possibility that customers were overcharged prior to the ban on discretionary commission arrangements in 2021. The probe will solely deal with historic finance agreements before this date.

Discretionary commission was banned on 28 January 2021, after it was found that some finance providers were setting higher interest rate for customers in order to increase their commission; the higher the interest rate, the more commission was paid for the firms offering the finance.

The FCA has found there was a conflict of interest between the rates being offered to consumers, and the commission that finance providers make.

What forms of car finance are affected?

The FCA’s investigation will primarily focus on PCP and HP deals. These are the types of finance that include an APR (annual percentage rate) form of interest. In other words, the variable rate that finance providers could adjust to increase discretionary commission.

Personal contract hire, business contract hire and other forms of leasing are not affected. This is because interest rates are not directly applied to a lease deal: the finance company always owns the car and it is not a loan. You are simply leant the vehicle for the duration of a lease contract. 

Read more: Leasing vs PCP & HP

What is the FCA concerned it might find?

The FCA is concerned that thousands of people could have been overcharged prior to the rule change in 2021. It could potentially end up being found that it is a widespread problem, and will result in a similar compensation scheme to the Payment Protection Insurance (PPI) scandal being implemented.

An FCA spokesperson said: “If we find there has been widespread misconduct and we find consumers have lost out, we will identify how best to make sure people who are owed compensation receive appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance”.

What is the FCA doing about it?

The regulator has paused its deadline by which motor finance firms have to respond to complaints about discretionary commission, and will now carry out a full investigation.

This should hopefully be complete by 25 September 2024 (the original date finance firms had to respond to complaints).

Will a redress scheme or order be created?

It’s unlikely the FCA would carry out an investigation unless they are likely to find finance providers were doing things wrong. This means it’s likely that after the investigation concludes it will set up some kind of redress scheme to ensure every affected customer can get compensation – even if they haven’t complained.

We’ll hear more on this in due course and will bring you further details as soon as we know more.

How much compensation will be available?

We don’t know yet, but this will vary on a case by case basis.

The amount customers have been overcharged will be extremely variable, with the total depending on the cost of the vehicle, the interest rate applied and the duration of the actual contract.

You can find out lots of information about leasing and other forms of car finance in our guides hub.