Britains car finance market is in crisis following a bombshell ruling on commission payments that could have far-reaching consequences for virtually any kind of loan.
Major firms have suspended some new car borrowing deals after the Court of Appeal ruled in favour of three car buyers who signed up to finance deals without being aware of commission payments paid to the dealers for acting as brokers.
Judges concluded car buyers had not given informed consent to a deal that saw car dealers given secret commission payouts for brokering finance deals.
Lloyds Banking Group, a major provider of car finance, said earlier this week it was assessing the potential impact of the judgment while others, including car maker Honda, have suspended their loans.
There is a risk some lenders could withdraw from the market completely - while experts have questioned whether it could affect other types of finance, including mortgages, if they have been equally mis-sold without declaring commission.
It means Britain is potentially facing PPI 2.0 - a follow-up to the payment protection insurance scandal that saw over £38.3billion paid out to people who were mis-sold extra products with financial borrowing.
And it all started when three perfectly ordinary Brits lodged county court claims - leading to a decision that might change how you borrow money forever.
To find out what happened - and whether you are affected - read on...
The car finance market is reeling from a Court of Appeal judgment that said dealers needed to disclose if they were receiving commission payments from arranging car finance
The Court of Appeal heard three county court cases concerning the mis-selling of car finance where it was not declared that the dealers would get a bonus
The Financial Conduct Authority estimates people may have unwillingly paid £1,100 of extra interest as a result of these discretionary commission arrangements
The scandal has been compared to that of payment protection insurance (PPI) - which cost banks a total of £50bn after they mis-sold the product with loans and credit cards
How did this all start?
In January this year, the Financial Conduct Authority (FCA) launched an investigation into discretionary commission arrangements (DCAs), also known as difference in charge (DIC) deals.
These were applied to some car loans between April 2007 and January 28 2021, when the FCA banned them outright - and allowed car dealers and other brokers to set the interest rates on car loans.
The watchdog took action because, unsurprisingly, it was concerned the arrangement incentivised car dealers to ramp up interest rates - so they would get a bigger commission payment from the lender who would gobble up the extra cash.
The FCAs investigation was due to wrap up in September but was delayed into next May because the lenders behind DCA deals werent stumping up the data on how many people were stung by the deals quickly enough.
But it also allowed the Court of Appeal to hear the cases of three ordinary Brits who had bought cars on finance without realising they had earned the dealerships some extra cash through the finance deal.
What was the court case about?
Across England and Wales, three county courts were presented with cases by people who claimed they had been mis-sold car finance.
The claimants were father and daughter duo Carl and Amy Hopcraft from Hull, Stoke-on-Trent postman Andrew Wrench - who had a penchant for fast cars - and Welsh factory supervisor Marcus Johnson.
Both Mr Wrench and Mr Johnson had a case with MotoNovo Finance - the trading name for FirstRand Bank - while the Hopcrafts
All three claimed they had not made a truly informed decision on how to buy their vehicles because each was motivated by the commission they would receive for referring people onto finance.
The dealerships, acting as credit brokers, had not been impartial in getting them the best possible deal on finance because of the commission, they argued.
Their cases were then transferred to the Court of Appeal following dismissals or otherwise inconclusive verdicts so the higher court could make an authoritative ruling - and the conclusion was explosive.
The judges ruled that the commission payments had been kept secret from the buyers - who had no idea they were paying more interest as a result
Shares in Close Brothers - one of the firms named in the bombshell case - tumbled after the judgment was released
What did the judges say?
Lady Justice Andrews, and Lords Justices Birss & Edis ruled that there was no dispute that the commission was kept secret from one claimant - and that the others were not explicitly told a commission would be paid.
They have ruled it was unlawful for the lenders to have paid the commission to the dealerships without the person buying the car being made aware of it - meaning the buyers had been unable to make a truly informed decision.
Mr Johnson, the court found, got a very poor deal, because the finance on his £6,399 Suzuki only covered £4,803.69 of the deal - the retail guide price for the car.
He financed the rest of the purchase with a personal loan worth £1,600 - almost the same amount the dealership received in commission.
Its important to note that the case was not explicitly about DCA payments and only one case - Mr Johnsons - saw commission paid this way.
But it has shone a light on the way that car dealers do business and encourage buyers to take out finance rather than paying in cash - with some even offering lower prices for vehicles if they are bought on tick.
How did the market react?
The judgment has rattled both the new and used car sectors with some captive finance services, directly offered by manufacturers such as Honda, suspending new loans.
Analysts and lawyers have suggested the backlash following the ruling could see consumers paid billions in compensation - similar to the payment protection insurance (PPI) scandal that saw billions paid out over missold loans.
It cost banks a total of around £50bn once claims had been settled.
Shares in Close Brothers tumbled as it suspended new loans and warned that that it could face significant liabilities as a result of the judgment.
Lloyds Banking Group, a major car financier via its Black Horse division, is setting aside millions in expected compensation. It has also scrapped commission payments for car loans altogether. Santander has delayed its financial results.
Both Close Brothers and FirstRand are appealing the ruling.
And on Tuesday, car finance firms met with the FCA to discuss next steps amid fears some firms could stop offering finance altogether.
Nikhil Rathi, chief executive of the FCA, told a dinner event on Tuesday: Our focus is on ensuring that customers receive fair treatment in line with the law and that the market for motor finance continues to function well, recognising that over two million people rely on it each year to buy a car.
We are encouraging firms to engage with us as they consider the impact the Court judgment has on their products and services, and we are grateful for the way firms have acted responsibly so far.
Lloyds Banking Group, which operates the Black Horse car finance group, has set aside millions in expected compensation
Spanish banking giant Santander, which also offers car finance, has delayed its quarterly financial results in the wake of the ruling
How could this affect other loans?
There are concerns that the wording of the ruling could mean it is applicable to other forms of lending outside of car finance where a broker receives a commission.
Because the ruling was not on the Financial Conduct Authoritys rules on car loans, but rather common law on lending altogether, it could potentially be applied to all forms of lending such as mortgages.
Investment firm Shore Capital Group said earlier this week it still had questions over whether the ruling could be extrapolated more broadly to include other lending agreements where commission is payable.
Reported by The Times, it said: For example, the ramifications of this could be huge if it was to include mortgage distribution, which is a largely intermediated industry, albeit there is no suggestion at this stage that this could be the case.
Stephen Haddrill, director general of the Finance Leasing Association, said the judgment was significant and unexpected and would have consequences which stretch far beyond the motor finance sector.
The boss of a major credit brokerage firm told MailOnline today: This case has not just affected regulated car finance.
It has affected all regulated and non-regulated finance business... I suspect it will reach to many other sectors that use any broker or intermediary.
Ultimately this case will see many lenders choose to withdraw from funding giving the consumer far less choice.
Who could be in line for DCA compensation?
Industry figures suggest as many as 90 per cent of Britains new cars are bought on a finance plan rather than being purchased outright - with £16.9bn of car finance handed out last year, according to the Financing and Leasing Association.
The FCA estimates 40 per cent of all vehicle finance deals between April 2007 and January 2021 had DCA loans attached. As 1.9million cars were sold in Britain last year alone, the number of people affected stretches well into the millions over the years.
Nor do DCA deals apply to just cars: motorbikes, campervans, vans and any other type of motor finance could have the arrangement.
If you took out finance between those dates - such as PCP (personal contract purchase) or HP (hire purchase) deals - you may be entitled to a payout.
And if you had more than one finance deal in that time, you could be in for multiple awards.
Consumer champion Martin Lewis has urged those who think they have been affected to get a complaint in now
Nikhil Rathi, chief executive of the Financial Conduct Authority, has urged car lenders to engage with the watchdog
What do I do - and how much could I get?
The FCA estimates that a typical historical car finance deal worth £10,000 could have as much as £1,100 too much interest applied thanks to the DCA.
Its investigation will conclude in May - and all signs point to the regulator ordering credit firms to return the money due, potentially with interest on top.
MoneySavingExpert has a template you can use to contact previous lenders - who will be named on your finance agreements - to ask whether your finance deal included a DCA and to lodge a formal complaint.
Martin Lewis, founder of the site, encourages those who may have had such deals to make the complaint sooner than later - as the FCA may introduce a time bar for these complaints after it wraps up its investigation.
He said in his latest newsletter: There are mutterings that if this (judgment) sticks, at its extreme theres a risk some lenders may withdraw parts of their operations from the wider consumer lending market.
So what we need is clarity, and we need it with urgency. If theres a Supreme Court appeal, it needs to happen ASAP and to report before the FCA does.
Plus the FCA and the Government need to urgently work to ensure a functioning competitive market.
More than one million complaints have already been lodged with finance firms over alleged mis-selling. It is not likely you will see any payout before 2026.
For those considering legal action, credit firms can be taken to court - as the appellants did in the case that eventually made it to the Court of Appeal. This can either be done yourself, or through a claims management firm or a lawyer.