The UK’s Financial Ombudsman Service (FOS) has said it received a record number of complaints in relation to car finance arrangements between October and December 2024.

In a press release, the FOS said: “The most complained about product this quarter was hire purchase (motor) which has risen due to complaints about motor finance commission arrangements, following Court of Appeal judgments against some lenders.”

Specific complaints from consumers in relation to car finance deals include:

• They were not told the car dealer would get commission from the finance provider for arranging the finance.
• The way someone’s car finance agreement was arranged was alleged to be unfair.
• The advice, information, or recommendation their car dealer gave them was not fair because they were influenced by the commission or fee they would get from their finance provider; and/or 
• Their car dealer didn’t give them the best interest rate available.

James Dipple-Johnstone, Interim Chief Ombudsman of the FOS said: “We are continuing to see high volumes of motor finance commission cases and would encourage businesses to consider whether complaints are covered by the FCA’s temporary complaint handling rules.”

He added: “Ongoing legal proceedings are impacting our ability to issue final decisions in these cases, but we are putting steps in place to ensure we can resolve them as quickly as possible when we have the clarity we need.”

Such is the impact of the sudden increase in complaints that the FOS has said it is “in the process of delivering a significant transformation programme – investing in new technologies, opening new team locations, and introducing new ways of working.”

The UK’s motor finance scandal is one of the biggest that regulators, banks and the courts are currently dealing with, with financial consequences estimated to reach tens of billions of pounds.

The context

In 2021, the UK’s FCA banned discretionary commission arrangements (DCAs), stopping brokers from receiving a commission fee from the lender or the bank when arranging a motor finance loan for customers.

The main argument against the commission fee was that it incentivized the brokers to secure loans for customers at higher rates than normal, in order to receive a higher commission from the lender.

In October last year, a Court of Appeal gave a judgment in favour of consumers and said the commission fee was unlawful if it was paid without written consent from, or the knowledge of, the customer beforehand.

That decision has now led to a flood of complaints by consumers against their brokers and lenders in motor finance arrangements made before 2021, with a potentially huge impact on the overall economy.

The FCA is currently reviewing DCA practices before 2021 and is set to announce its findings in May this year. It can potentially “include a consumer redress scheme as a possible resolution.”

At the same time, lenders have appealed to the Supreme Court against the Court of Appeal’s judgment. The Supreme Court is set to hear the appeal on April 25 this year, and if it agrees with the Court of Appeal’s judgement then the financial consequences for lenders could be drastic.

And if the FCA and the Supreme Court side with consumers, the likes of Lloyds Banking Group PLC, Santander UK PLC, Barclays PLC and Close Brothers Group PLC could end up paying billions in redress.

Last month, the Supreme Court blocked an attempt by the government to protect the country’s motor finance industry from potentially paying billions of pounds in compensation to customers.

Without entirely ruling out some sort of redress for customers, the government has argued that any heavy fine on the banks could negatively affect the competitiveness of the UK market.