Millions of drivers could receive compensation in the near future as car finance companies scramble to prepare for a flood of complaints.
The Financial Conduct Authority (FCA) is undertaking a review into whether drivers could be owed compensation after being overcharged when taking out car loans.
The investigation is looking into potential issues for people who took out car finance between 2007 and 2021, with millions of pounds potentially being required to settle the cases.
Money saving expert Martin Lewis has suggested the issue could be on par with the PPI scandal, with total payouts estimated to be at least £1,100 per person.
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The current car finance issue has been compared to the PPI scandal
GETTYMore than 1.1 million drivers have used the Martin Lewis tool on his website to send complaints to several car finance companies.
Drivers made a number of complaints to lenders claiming compensation for commission arrangements before law changes in 2021, which saw the FCA ban car dealers benefit from models which would have incentivised dealers to raise costs for customers.
Other experts are now warning that organisations which offer car finance face a serious headache, especially with forecasts suggesting that it could result in the “second biggest reclaim payout in UK history”.
Simon Evans, chief executive of trade group Consumer Redress Association, highlighted the issue for companies and how much more serious the problem could become.
He said: “If you think about the number of people who have bought cars in the last decade-and-a-half, there is a swathe of people who will have bought it in that way.
“What we are seeing through our member firms who are engaging with consumers at the moment is that actually each person has an average of about 2.3 claims.
“So they have had two or three cars in that period and all of those qualify for a claim.”
While he praised the work Martin Lewis was doing to help drivers claim, he noted that the number of drivers complaining may not be as high as reported, given that they may not have gone through the steps of sending the complaint to the company.
The idea that recent car finance issues could be on par with the PPI scandal has also been challenged by experts. According to the FCA, more than £38.3billion has been paid out for this scandal, which saw banks compensate customers who were sold personal protection insurance from the mid-1990s.
Nikhil Rathi, chief executive of the FCA, said the payouts would not be as large as the PPI scandal, given that the watchdog had intervened far sooner.
Lloyds Banking Group, which owns Black Horse, the UK’s largest car finance lender, has set aside a provisional £450million to cover potential costs.
Close Brothers Group, another major motor finance lender, has also unveiled plans to support its structure by £400million as it prepares for the findings of the review expected in September.
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Martin Lewis has warned that car finance firms could be forced to pay out hundreds of millions of pounds
PAMartin Lewis previously wrote on Twitter that two main factors could play out, namely a redress scheme where companies need to pay compensation to all affected customers even if they haven’t complained or pay money based on a “set formula” to those who have complained.
He added: “The FCA wouldn’t do this unless it was likely to find they were doing it wrong.”