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The Guardian - UK
The Guardian - UK
Business
Jess Clark

Is car finance the next PPI? Claims management firms cause concern

A selection of used cars of different manufacturers for sale in a garage forecourt
In recent years more than 90% of new car purchases and an increasing number of used cars have been bought on finance agreements. Photograph: Findlay/Alamy

UK consumers were this week urged to avoid the “plague” of claims management firms targeting people who may have been mis-sold a car finance deal. It has prompted suggestions that these firms may regard car finance as “the next PPI”.

Complaints about car finance lenders almost doubled in the last financial year, driven by an increase in third-party firms submitting claims on behalf of individuals.

That has led to warnings that affected consumers could be missing out on the full amount of compensation owed.

According to the Financial Ombudsman Service, which handles consumer complaints related to financial products, there were 11,452 complaints about motor finance deals between 1 April 2022 and 31 March 2023. That is up from 6,128 complaints in the previous financial year.

The proportion of claims relating to commission, fees and charges on these products increased from 1,472 in 2021-22 to 5,658 in 2022-23.

The ombudsman says about 90% of the 2022-23 complaints have been brought by third-party representatives – that is, claims management firms and law firms.

These companies typically operate on a “no win, no fee” basis but take a cut of any compensation offered if the claim succeeds. The rate varies but many firms take about 25% plus VAT.

However, the Financial Ombudsman Service is free to use, and consumers don’t need to use a third-party claims management firm to make a complaint.

The consumer rights expert Martyn James says the behaviour of claims management firms in this area is similar to the multibillion-pound payment protection insurance (PPI) mis-selling scandal.

“Mis-selling certainly seems to have been widespread when it comes to affordability – and the inherent complexity of how these deals work makes it very difficult to know where you are with the deal and what you will ultimately owe,” he adds.

“The latest ombudsman data seems to be driven by the plague of claims management companies who previously dominated the PPI market.”

James says: “Don’t use a claims manager to make a complaint. If you are unhappy, then just explain what you are unhappy with.”

The rise in complaints suggests some claims companies view the car finance sector as a new money-making opportunity. There has been an increase in the number of adverts from these firms on social media, and some may worry that this could lead to a new wave of spam text messages and unwanted cold calls.

In recent years more than 90% of new car purchases and an increasing number of used cars have been bought on finance agreements.

Car finance payments are typically the second-largest household expense after mortgage costs.

Car key in door
Car finance payments are typically the second-largest household expense after mortgage costs. Photograph: Businessman/Alamy

There are a number of car financing options on the market, including personal contract purchase plans and hire purchase. Most involve the customer paying a deposit and signing a credit agreement to pay a monthly fee, with interest, with a view to eventually owning the car or swapping to a different vehicle. Customers can incur charges for things such as going over the mileage limit.

The recent rise in complaints follows a ban on motor finance “discretionary commission” that came into force in January 2021.

Previously, car retailers and motor finance brokers were able to receive commission linked to the interest rate that customers paid – creating an incentive to sell more expensive credit.

After an investigation, the City watchdog the Financial Conduct Authority ruled that the widespread use of this type of commission “creates an incentive for brokers to act against customers’ interests”, saying the ban would save consumers £165m a year.

Claims management companies have jumped on that issue, as well as other complaints including those relating to charges, fees and unaffordable financing agreements.

“We are investigating the issues raised by these complaints carefully. We will continue to look at each case on its own individual merits and circumstances,” a spokesperson for the Financial Ombudsman Service says.

The ombudsman service publishes decisions on its website. In one case, a customer complained she had been charged £599 for accepting a six-month payment holiday from her hire purchase agreement during the coronavirus pandemic, claiming the details had been hidden in the small print.

The ombudsman ruled that the motor finance firm should pay £300 in compensation. As the woman was represented by a third-party firm, a portion of that would go to the claims company. If, for example, it charged 25%, the customer would have to forfeit £75 of her compensation.

Another upheld complaint came from a customer who claimed she had been sold an unaffordable hire purchase agreement. In that case, the ombudsman ordered the company concerned to pay her £5,300. The complainant was represented by a third-party firm, which would take a £1,325 cut, assuming it charged 25%.

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