Examining lenders’ role in car finance mis-selling

Car dealers and other third parties acting as car finance brokers are central to the significant mis-selling identified by the Financial Conduct Authority (FCA) as having occurred between 6 April 2007 and 1 November 2024. However, that raises a natural question: why are the lenders primarily being held accountable for what the FCA estimates will be an £8.2 billion redress bill?

The answer is that car finance mis-selling is not as simple as a salesperson failing adequately to disclose a commission arrangement or pushing a consumer towards a product and leaving the lender to deal with the consequences.

That is because lenders did not simply ‘fund deals’ and put up the money, but:

• designed the commercial model;
• set the incentives that facilitated and motivated brokers’ actions; and
• controlled, or failed to control, disclosure standards.

Lenders argue that the regulator is acting retrospectively in imposing higher standards now than were expected by the law at the time. However, in its Motor finance consumer redress scheme consultation paper (CP25/27), the FCA states that its extensive review of 32 million motor finance agreements found that ‘many firms broke laws and regulations in force at the time by failing to disclose important information.’

Why lenders sit at the centre of the motor finance ecosystem

When you buy a car on finance, most of your interactions are with the car dealer or broker. They sell you the vehicle, arrange your finance, promote products to you such as cosmetic cover, servicing, and MOT plans, contact you about add-ons like GAP insurance, and ask if you would like to change your vehicle when the time comes.

Meanwhile, in the background, your lender typically:

• designs the architecture of the product, including the terms around Personal Contract Purchase and Hire Purchase financing, balloon payment structures, fees and default charges;
• sets the pricing framework, including interest rate ranges and how these may vary by risk or credit scoring tier;
• determines and funds the remuneration models that dictate how dealers and brokers are paid;
• controls key governance levers, including oversight of dealer and broker conduct; and
• ultimately owns the regulated complaint-handling process and is responsible for any redress payments.

This is why the FCA’s proposed redress scheme is directed at lenders and their historic practices, and why the regulator has constructed a substantial evidence base to support and justify its interventions.

Commission was not an accidental by-product of car finance deals: it was a designed feature

The regulator’s investigation into car finance mis-selling, which commenced on 11 January 2024, and its redress proposals published on 7 October 2025, focus on commission structures, including those that created incentives for brokers to increase the consumer's cost of credit without sufficient disclosure, and in some cases restricted or shaped the options presented to consumers.

From the lender’s perspective, commission is not a simple, dealer-side commercial detail, but a core part of its distribution strategy. The core issue is the alignment of incentives:

• If a dealer earns more commission when the consumer’s interest rate is higher, then the dealer has an economic incentive to steer consumers towards an agreement with a higher APR.
• If the lender establishes and permits that model and provides the mechanism that enables it to operate, then it is not a passive bystander.

How lenders enabled motor finance mis-selling in practice

1. Setting commission structures that increased consumers’ payments

Lenders enabled mis-selling by creating a commission structure and remuneration model for car dealers and brokers that increased consumers' costs while relying on inadequate or non-existent disclosure at the time of sale. Even where lenders did not explicitly instruct car dealers to charge a higher rate, the use of discretionary commission models, combined with insufficiently robust parameters and oversight, created the conditions for this to happen.

The FCA outlines the relationship between inadequate disclosure and consumer outcomes in detail in Consumer Redress Scheme for Motor Finance, Technical Annex 1, Data, Analysis of Loss and Liability and Cost Methodologies.

3. Weak governance over dealers’ and brokers’ conduct

Lenders typically have an armoury of tools they can use to manage the conduct of third parties that offer their products, including:

• onboarding materials;
• initial and ongoing training;
• auditing programmes;
• mystery shopping;
• monitoring of sales patterns; and
• contractual enforcement.

Regulatory findings and subsequent legal developments indicate that disclosure was inadequate in a significant number of agreements. The question, therefore, is whether the lender’s governance framework was adequate to prevent systemic poor practice across its distribution network.

A significant portion of the regulator’s diagnostic work has been explicitly aimed at understanding the extent to which such frameworks existed and were implemented, and whether there were widespread or regular failures in their use. If adequate controls existed on paper, why did they not prevent widespread failings in practice?

3. Limited monitoring and action on pricing dispersion and outliers

Lenders would have had near real-time oversight of several indicators, including:

• wide ‘spreads’ between ‘base’ interest rates and rates paid by consumers with similar risk profiles;
• clusters of high-APR agreements concentrated in specific dealers or brokers; and
• shifts in pricing that correlated with changes to commission models.

Where this data existed, and lenders failed to identify trends or intervene when they did, in our view they bear responsibility for enabling such practices to continue.

4. Contractual agreements that restricted consumers’ choice

Tied agreements meant that car dealers or brokers were effectively pushing consumers toward a specific lender, sometimes while claiming independence or telling consumers they had chosen that lender from a comprehensive panel. Where such tied arrangements were not disclosed, lenders enabled mis-selling and restricted consumers’ choice by limiting competition and access to potentially better-priced alternatives.

The FCA’s redress scheme means lenders can still shape outcomes

One concern surrounding the FCA's redress proposals is that they are largely 'lender-led,' meaning that the lenders who enabled motor finance mis-selling for years, through product design, the use of incentives, and oversight failures, retain a dominant position in shaping consumer outcomes.

From a consumer’s standpoint, potential issues include:

• Information asymmetry: lenders hold the data, pricing, and modelling assumptions, while consumers must make decisions based on the information lenders provide.
• Complexity: redress calculations can be technical—the All-Party Parliamentary Group (APPG) on Fair Banking published a report in November 2025, warning that lenders could exploit this complexity and act as ‘judge and jury’ on consumers’ claims.
• Incomplete data: older agreements may be more complex to evidence due to incomplete records, creating scope for disputes around disclosure and the potential for mis-sold consumers to fall through the cracks.

Although the regulator's redress proposals mean you can obtain compensation at no cost, instructing a solicitor can ease the burden of navigating the process. A solicitor may also identify additional claims—such as irresponsible lending concerns or mis-sold add-ons, including GAP insurance—that could increase your total redress award.

Register your car finance claim with Harcus Parker here.