Mis-sold Car Finance Claims: Is the Payday Loan Sector Next?

The recent car finance mis-selling scandal has raised concerns across the financial sector, but could it impact the payday loan industry? This article examines the potential ripple effects, focusing on whether payday lenders might face similar scrutiny.

While car dealers and lenders grapple with liability, we explore why the payday loan sector appears insulated from these issues, thanks to stringent FCA oversight. Could this set a precedent, or is it a separate matter entirely?

An individual named Marcus Johnson from Cwmbran took legal action because he believed he had been mis-sold car finance. His claim centered on the failure of either the car finance company or the car dealership to disclose that the commission they received from the lender could influence their choice of lender. He argued that this lack of transparency may have resulted in him being placed with a higher-cost lender, driven by the commission the dealer stood to earn, rather than what was in his best interest.

We want to make it clear that we have every sympathy for the gentleman who made this complaint. Some may be surprised to hear that we fully agree with his position. If he was placed with a more expensive lender solely because of the commission a seller stood to receive, this constitutes a serious breach of trust. At the very least, he should have been informed that a better deal might have been available elsewhere.

In our view, his complaint is entirely valid, and he deserves redress from either the car showroom or the lender involved.

In our view, financial harm to the borrower only occurs if there were competing lenders willing to offer finance on better terms. Legally, you cannot claim damages without demonstrating actual harm. Just because one lender approved the application does not mean others would have done so, or on more favorable terms.

But is it enough to argue that financial damage occurred simply because the car dealer prioritized sending the credit application to the lender offering the highest commission? That’s a challenging question. If the courts determine that this constitutes financial harm, it could set a precedent that puts the entire finance industry on notice. This could extend far beyond car finance—to car insurance comparison sites, travel agents, and any business model where commissions influence recommendations. The implications could be profound, potentially reshaping the way businesses operate across multiple sectors.

This issue has likely been occurring since the 1990s. Assuming the original verdict is upheld in higher courts, where will the line be drawn for historic claims? The ultimate problem here is going to be the data available to the parties. Have records been kept going back as far as people think?

The main problem in finding out if someone has been mis-sold car finance is going to be the need for evidence that another lender did, or would have, approved their application. While records may exist for the actual loan, is there evidence that another lender did or would have approved the application? How much cheaper would they have offered the loan? In our view, that is going to be unlikely and very difficult to prove.

A lot will depend on how the car finance process was structured. Did the car dealer submit the application to multiple lenders directly? If so, the car finance company may not have been involved in the mis-selling. They wouldn’t necessarily have known that the car dealer failed to inform the borrower about the commission they would receive. Similarly, the car finance company may not have been aware that the dealer was approaching multiple lenders.

In our view, the responsibility for any potential mis-selling is most likely to rest with the car dealers rather than the lenders. If the dealer passed the application to a separate broker, and that broker failed to inform the dealer about commissions, then the issue could lie with the broker—or possibly still with the dealer for not ensuring proper disclosure.

Ultimately, it seems highly unlikely, in our opinion, that the lender would bear liability in this situation.

In our view, financial harm to the borrower only occurs if there were competing lenders willing to offer finance on better terms. Legally, you cannot claim damages without demonstrating actual harm. Just because one lender approved the application does not mean others would have done so, or on more favorable terms.

But is it enough to argue that financial damage occurred simply because the car dealer prioritized sending the credit application to the lender offering the highest commission? That’s a challenging question. If the courts determine that this constitutes financial harm, it could set a precedent that puts the entire finance industry on notice. This could extend far beyond car finance—to car insurance comparison sites, travel agents, and any business model where commissions influence recommendations. The implications could be profound, potentially reshaping the way businesses operate across multiple sectors.

In our view, we can only see a complainant getting back the difference between the loan they took and the loan they would have received if the car dealer had gone to the cheapest lender. The compensation amount could vary widely, and it would be irresponsible for us to speculate. For some subprime borrowers, it may be as little as £50. On the other hand, if a prime borrower has been placed with a subprime lender, the difference could be well over £2,000 on some finance agreements.

In our view, the answer is no. Most direct lenders retained all applications in-house and did not pass them to other lenders, making it unlikely for them to be held responsible for any mis-selling. Furthermore, most, if not all, of the payday loan lenders from years gone by have since gone out of business.

If the focus is on activity from 2017 onwards, we are confident that no mis-selling has occurred. When we conducted our FCA permissions application process in late 2016/17, the FCA scrutinised how lenders were chosen for applicants. We had to clearly outline the entire application process, and we distinctly remember confirming in writing that lenders were not matched with borrowers based on commission payments.

Credit where it’s due: the FCA was proactive in 2017, recognising that this could become an issue in the payday loan industry. Their oversight at the time gives us confidence that the current situation in 2024 does not impact our sector.

That said, we are a little surprised to see the car finance industry facing these challenges today. Given the FCA’s thoroughness with the payday loan sector, we would have expected similar standards to be enforced in the car finance industry.

We will be monitoring the situation, but we (and to our knowledge, lenders in our sector) are not concerned about these developments.

Just after we wrote this article. Permission was granted for the Car Finance provider to take the case to the Court of Appeal.

It goes to validate everything we believed in, we are doubtful that this claim will be succesful and lead to a tidal wave of claims against the car finance lenders, never mind Payday Lenders from 7 years ago. Although we nthink he was right, proving it and proving who was at fault is just too difficult.