youK consumers were urged this week to avoid the “scourge” of claims management companies that target people who may have been mis-sold on an auto finance deal. It has led to suggestions that these companies may consider auto financing “the next PPI.”
Complaints about auto finance lenders nearly doubled in the past fiscal year, fueled by a rise in third-party companies filing claims on behalf of individuals.
That has led to warnings that affected consumers could miss out on the full amount of compensation owed.
According to the Financial Ombudsman Service, which deals with consumer complaints related to financial products, there were 11,452 complaints about auto finance deals between April 1, 2022 and March 31, 2023, versus to the 6128 complaints from the previous year.
The proportion of complaints related to commissions, fees and charges on these products increased from 1,472 in 2021-22 to 5,658 in 2022-23.
The ombudsman says that around 90% of the 2022-23 complaints have been filed by representatives of third parties, namely claims management firms and law firms.
These companies often operate on a “no win, no fee” basis, but they keep a portion of any compensation offered if the claim is successful. The rate varies but many companies charge around 25% plus VAT.
However, the Financial Ombudsman Service is free to use and consumers do not need to use a third-party claims management company to file a complaint.
Consumer rights expert Martyn James says the behavior of claims handling companies in this area is similar to the multi-billion pound payment protection insurance (PPI) misselling scandal.
“Certainly, misselling 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 stand with the deal and how much you will ultimately owe,” he adds.
“The latest ombudsman data appears to be driven by the plague of claims management companies that previously dominated the PPI market.”
James says, “Don’t use a claims administrator to file a complaint. If you are not satisfied, just explain what you are not satisfied with.”
The rise in complaints suggests that some claim companies see the auto finance sector as a new opportunity to make money. There has been an increase in the number of advertisements from these companies 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 acquired through finance deals.
Auto finance payments are typically the second largest household expense after mortgage costs.
There are a number of auto financing options on the market, including personal contract purchase plans and installment purchases. Most involve the customer paying a deposit and signing a credit agreement to pay a monthly fee, with interest, with an eye toward eventually owning the car or trading it in for a different vehicle. Customers may incur charges for things like going over the mileage limit.
The recent spike in complaints follows the auto finance “discretionary fee” ban that went into effect in January 2021.
Previously, auto retailers and auto finance brokers could receive a commission tied to the interest rate customers paid, creating an incentive to sell more expensive loans.
After an investigation, the city’s watchdog, the Financial Conduct Authority, ruled that the widespread use of this type of commission “creates an incentive for brokers to act against the interests of clients,” saying that the ban would save consumers £165m a year.
Claims management companies have been quick to address that issue, as well as other complaints, including those related to unaffordable charges, fees, and financing arrangements.
“We are carefully investigating the issues raised by these allegations. We will continue to look at each case on its own individual merits and circumstances,” says a spokesperson for the Financial Ombudsman Service.
The ombudsman service publishes decisions on its website. In one case, a customer complained that he had been charged £599 for agreeing to a six-month waiver of his installment purchase contract during the coronavirus pandemic, claiming the details had been hidden in the fine print.
The ombudsman ruled that the car finance company should pay compensation of £300. Since the woman was represented by a third-party firm, a portion of that would go to the claims company. If, for example, you charged 25%, the client would have to give up £75 of their compensation.
Another confirmed complaint came from a customer who claimed they had been sold an unaffordable installment purchase contract. In that case, the ombudsman ordered the company in question to pay him £5,300. The claimant was represented by a third-party company, who would take a cut of £1,325, assuming they collected 25%.
