Auto finance applications are expanding to cover leases, giving lenders more time to respond
Lenders in the auto finance market have been given more time to deal with a surge in complaints, as the City regulator tries to expand the scope of applications and include leases.
The Financial Conduct Authority (FCA) has set a new deadline of 4 December 2025 for lenders to respond to customer complaints about discretionary and unfair commission arrangements. Importantly, the appeals process now covers not only auto finance loan agreements but also car lease agreements.
The move by the FCA follows a landmark decision by the Court of Appeal in October. The court ruled that car dealers receiving commissions from lenders without the customer’s informed consent is illegal, increasing the likelihood of compensation claims. Previously, the focus was on discretionary commissions linked to interest rates on financial contracts—a practice that was phased out in 2021. Now, this issue may affect all loan commissions that were not properly disclosed, increasing the industry’s exposure to filing corrections.
According to the FCA, the decision of the Court of Appeal does not directly cover leasing, but the regulator has decided to include such agreements in the complaints process to ensure that consumers using the same products have consistent protection and repair. “Consumers also use leasing to access vehicles and it is important that consumers using the same products for the same purposes are treated in the same way,” the FCA said in a statement.
The FCA had already signaled in January that it was investigating the commission’s practice of discretionary car finance. Such arrangements allow sellers to earn commissions based on the interest rate they charge customers, which can lead to higher borrowing costs. These deals were banned from 2021, but loans made before that date are still being processed.
From 2007 until the end of 2020, approximately 14.6 million car finance agreements include these discretionary commissions, FCA notes. A recent legal decision expands the scope beyond these programs, potentially adding up to $11.3 million in additional loans to the claims pool. Customers charged undisclosed commissions may now be entitled to compensation.
This extended credit can be very expensive. Credit rating agency Moody’s has previously estimated that if the Court of Appeal’s decision is upheld, the cost of repairs could be as much as £30 billion. Although a High Court appeal on the matter is pending, the FCA expects a significant increase in complaints regardless. Such a figure would bring the car finance case closer to the infamous payment protection insurance (PPI) scale, which ended up costing UK financial institutions £50 billion in compensation.
While major banks such as Lloyds, Barclays, and Santander UK may have the balance sheet strength to absorb these potential costs, smaller and specialty lenders face tougher prospects. Moody’s warns that mid-market financial providers, including Close Brothers, Aldermore, Investec, and the captive arms of automakers such as Ford and Volkswagen, could face “significant declines in earnings and liquidity.”
The FCA’s move to extend the complaints process and give lenders a deadline to respond by December 2025 is aimed at ensuring consumers have a consistent and straightforward way of redress, while giving the industry time to adjust. As the industry braces for a wave of claims, all eyes will be on the Supreme Court’s decision and any further clarifications from regulators on how to handle this potentially costly new chapter in auto finance.
