FCA launches probe into historic commission agreements by motor finance groups

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British auto lenders are braced for more than £1bn in compensation payouts after the UK’s top financial regulator launched an investigation into historical commission agreements by car dealers stretching back a decade.

The Financial Conduct Authority said on Thursday it would investigate interest-linked deals offered by motor finance companies following a surge in customer claims, which could lead to redress that compliance experts said echoed the payment protection insurance scandal.

The PPI scandal dates back to the 1990s when banks mis-sold a type of insurance product to millions of customers. Banks were later hit with billions of pounds worth of fines and customer compensation claims.

In 2021, the FCA banned discretionary commission arrangements, where car dealers are able to set the interest rates in customer contracts. The FCA said that the arrangements gave car finance brokers and dealers an incentive to raise interest rates on customer loans.

The regulator said on Thursday that it would review how “several firms” had applied commissions before the ban, after a high number of customer compensation claims for agreements from before it came into effect.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement,” the FCA said. “And if necessary, resolve any contested legal issues of general importance,” it added.  

The regulator noted that a “high number” of complaints had been rejected by motor finance groups that “consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements”. 

The FCA declined to comment on the scope of its investigation until it had undertaken work to see how widespread the issue was. However, the…