Imagine if we told you that the majority of car insurance finance was mis-sold, and you may be entitled to a refund on insurance bought in the last 6 years.
You wouldn’t believe us, would you? But that could actually be the case, in fact we are almost certain that it is the case and consequently could mean it is the next big mis-selling scandal that is about to hit. If we are right in our understanding (and the rules seem pretty clear to us that we are), this could potentially cost hundreds of millions of pounds to the finance industry.
When people go to buy car insurance, customers are often offered two different prices. One price is if they pay for their year's cover in a lump sum, and the other price option will be to spread the payment over twelve months, and it is this payment that is spread over 12 months that appears to have a massive regulatory flaw.
The FCA requires consumer finance providers to perform affordability checks before offering credit to consumers, and they simply haven't been doing them. That makes the interest earned on those credit products mis-sold and therefore liable to be refunded in full.
Is it really finance or just pay as you go?
Most people think that they pay as they go for car insurance that is spread over 12 months, they don't and this is important. The way insurance companies have set up these payment methods means that it is clearly a credit product. A loan is provided by a third party to pay the insurer the full amount at the start. The customer then pays back the finance company, not the insurer, they are completely separate.
The company that offers finance is different from the company that provides the insurance. This means that the credit company should be doing affordability checks before supplying the loans.
Just because the lender sends the money directly to the insurance company instead of to the buyer, who then pays the insurance company, doesn't make it any less of a loan than if you got it from "Quick Loans", nor does it mean the rules don't apply to them. They do.
So what happens now?
Well, that is a massive question. In our opinion, it is clear. When our industry didn't perform affordability checks, we (the unsecured loan industry) were made to pay millions in compensation to borrowers going back 6 years. Why should these loan providers be any different?
We think they are bang to rights, and those in the legal profession we have spoken to seem to say the same. It is time for similar pay-outs to begin. People just need to complain.
Will this be the next PPI?
The number of people who split Car insurance payments over 12 months is huge and when you start to go back as far as six years – this scandal could be enormous if people complain, especially if the interest on all the mis-sold loans had to be repaid. The average percentage on car insurance loans is above 30%.
Bigger than PPI? Not sure on that, but it’s certainly one to watch.