Lenders in the auto finance market have been given extra time to address a looming wave of complaints, as the city’s regulator moves to expand the scope of claims to include leasing agreements.
The Financial Conduct Authority (FCA) has set a new deadline of December 4, 2025 for lenders to respond to customer complaints regarding both discretionary and non-discretionary commission schemes. Importantly, the complaints procedure now covers not only traditional car finance credit agreements, but also car leasing agreements.
This move by the FCA follows a crucial decision by the Court of Appeal in October. The court ruled that car dealers receiving commissions from lenders without the customer’s informed consent were unlawful, expanding the potential scope of claims for compensation. Previously, the focus was on discretionary fees linked to interest rates on financing agreements – a practice that was banned in 2021. Now the issue could impact any loan commissions that are not properly disclosed, increasing the industry’s exposure to claims.
According to the FCA, the Court of Appeal ruling does not directly concern leasing, but the regulator has decided to include such agreements in the complaints procedure to ensure that consumers using similar products receive 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 similarly,” the FCA said in a statement.
The FCA had already indicated in January that it was investigating the practice of discretionary commission arrangements in car financing. Such arrangements allowed dealers to earn commissions based on the interest they charged customers, potentially leading to higher financing costs. These deals will be banned from 2021, but old loans made before that date will remain under scrutiny.
From 2007 to the end of 2020, around 14.6 million car finance deals included these discretionary commissions, the FCA notes. The more recent legal ruling broadens the scope beyond these schemes, potentially adding an additional 11.3 million loans to the pool of claims. Customers who have been charged undisclosed commissions may now be entitled to compensation.
This expanded liability could prove costly. Credit rating agency Moody’s previously estimated that if the Court of Appeal ruling is upheld, recovery costs could be as much as £30 billion. Although an appeal to the High Court on the matter is pending, the FCA expects a significant increase in complaints in any case. Such a figure would bring the car finance case closer in scale to the infamous payment protection insurance (PPI) scandal, which ultimately cost UK financial institutions around £50 billion in compensation.
While major banks such as Lloyds, Barclays and Santander UK may have the balance sheet strength to absorb these potential costs, smaller and more specialist lenders face a tougher outlook. Moody’s warns that mid-market financial services firms, including Close Brothers, Aldermore, Investec and captive finance arms of automakers such as Ford and Volkswagen, could face “a bigger hit to earnings and capitalization.”
The FCA’s move to broaden the complaints process and give lenders a response deadline of December 2025 is aimed at ensuring consumers have a consistent and simple redress route, while giving the industry time to adapt. As the industry 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 auto finance compensation.