A legal claim is being launched against three of the country’s largest motor finance companies for incentivising car dealerships to sell expensive finance to buyers of second-hand cars.

If successful, the action could trigger damages of £1billion, with around one million people eligible. In the 2010s, loan providers gave car dealers discretion to sell loans to motor buyers with a range of interest rates. 

The higher the interest rate a dealer got a customer to sign up to, the more commission they received – and the more profit the loan company made on the finance. Such discretionary commission was banned by the Financial Conduct Authority (FCA) in 2021 in order to ‘protect consumers’. 

But now, consumer advocate Doug Taylor, supported by litigation specialist Scott+Scott, is seeking damages for those borrowers who, when discretionary commission was prevalent, ended up with more expensive loans than they should have done. 

The case, filed at the Competition Appeals Tribunal, is an ‘opt-out’ action which means all eligible borrowers will be automatically included in the action. The claims are against loan providers Black Horse (part of Lloyds), Santander Consumer (UK) and MotoNovo Finance. Between them, they dominate the car finance market.

Car claims: The higher the interest rate a dealer got a customer to sign up to, the more commission they received

Car claims: The higher the interest rate a dealer got a customer to sign up to, the more commission they received

Anyone who entered into motor finance agreements with these companies between October 2015 and January 27, 2021, when the FCA ban came in, is covered by the claim. More details on the claim can be found here.

On Friday, Taylor said the action was based on a ‘clear case of consumer detriment’ and for consumers represented ‘the simplest way’ to get damages.

MotoNovo, owned by bank Aldermore, said: ‘We’re aware of a legal claim and we are preparing a response.’ 

Santander said it did not comment on ‘actual or potential claims against us’ while Lloyds said it was committed to ensuring customers have clear information to make informed decisions on the products they buy.

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