Claims firms have found the new payment protection insurance — car finance mis-selling. Claims management companies do the legwork for customers who are owed compensation in exchange for a cut of their payout. And they have been flooding social media with adverts offering to lodge complaints on behalf of people who fear they were mis-sold car finance deals — where brokers were incentivised to give you a worse deal — but they could take up to 30 per cent of any compensation you win.

“Finance companies are now paying out millions of pounds on mis-sold car finance claims,” a video on the social media app TikTok that has been viewed more than 3,400 times said. “You can find out for nothing the potential value of your claim in just ten seconds. Just click the link below and enter your registration number and the amount you financed.”

The Meta Ad Library allows you to search for adverts that are live on its social media platforms Facebook and Instagram. On Thursday there were 220 results for the search “mis-sold car finance”. Another advert on Facebook and Instagram said: “Car finance lenders set to refund millions. Ever purchased a car on finance? You may be owed a refund worth £1,000s. Enter your reg plate below to start your claim.”

Experts have warned that customers could lose out if they go to a claims management firm. James Daley from the consumer website Fairer Finance said: “Unfortunately these firms can be like vultures, desperately scrabbling around for the next opportunity. They have a part to play and can help people who may otherwise have been unaware they could claim money, but they are very expensive and there is a good chance that motor finance companies will be forced to make automatic refunds to customers anyway.”

What has happened?

In January the Financial Conduct Authority (FCA), the City watchdog, said it would investigate car finance loans amid concerns about “widespread” mis-selling.

Most people take out a loan to buy their car. In 2023 about 78 per cent of cars were bought using car finance and customers borrowed £52 billion, according to the Finance & Leasing Association, an industry body.

The FCA is investigating a commission model that was banned in January 2021 that incentivised brokers to sell customers more expensive loans to get more commission. Thousands of customers have complained about how much they were charged before so-called “discretionary commission arrangements’ were banned.

In 2019 the FCA raised concerns that customers were not always told about the way commission was charged on their loans. Since 2014 car dealers have been required to tell borrowers if they get commission for selling them a loan. If customers ask, they are supposed to disclose the amount of commission they receive.

The FCA’s investigation is expected to last until September, at which point it could set up a redress scheme. Some lenders have started setting aside millions of pounds to compensate customers. The investment bank Jefferies estimates that customers could be owed £13 billion in compensation.

• How does car finance work and is it worth it?

The rise of claims firms

Claims firms were widely used in the 2010s amid the payment protection insurance (PPI) mis-selling scandal, when it emerged that banks and credit card firms had sold unnecessary insurance to customers who were covered under consumer protection laws. Financial firms paid out £38.4 billion in compensation from 2011-19, according to the FCA.

In 2021 the government changed the rules to clamp down on whiplash claims after an “unacceptably” high number were made. It banned firms from offering to settle whiplash claims for customers without first getting medical evidence. About 550,000 whiplash claims were made in 2019.

Claims management firms have been regulated by the FCA since 2019. In 2022 the fees they can charge were capped — for a payout of up to £1,499 firms can charge up to 30 per cent or £420, depending on which figure is lower. The fees decrease gradually to 15 per cent, or £10,000, for payouts of more than £50,000.

Often these firms go through a process on behalf of customers that you could complete yourself free of charge by complaining directly to a company then escalating complaints to the Financial Ombudsman Service, which can award financial compensation.

There are concerns that firms are clogging up the complaints system with spurious claims. Last week the ombudsman said it was considering allowing claims management firms three free cases a year before charging them up to £250 a complaint, with that amount falling to £75 if the complaint was upheld. It said 20 per cent of the complaints it gets come from professional representatives acting on behalf of customers.

How to complain

It is free to make a claim if you think you have been mis-sold car finance. You can complain directly to your lender, and they are usually required to provide a response within eight weeks. However, the FCA has paused the deadline for firms to respond until its review is published in September.

If you are not satisfied with the response you get you can escalate the complaint to the ombudsman. But the ombudsman too has paused dealing with complaints about car finance mis-selling while it awaits the outcome of a number of legal cases.

In April Barclays started legal proceedings after the ombudsman upheld a customer complaint about the commission charged on a car finance loan. The outcome of the case could influence future claims. The Financial Ombudsman Service said: “We have heard from more than 20,000 people with concerns that they were charged too much for their finance.

“It is disappointing that ongoing legal proceedings about motor finance commission have impacted our ability to issue final decisions in some of these cases. However, we’re determined to progress consumers’ complaints as far as we can, and firms should continue to investigate and respond to complaints promptly.”

• Who can claim compensation for car finance?

‘I lost 32% of my PPI compensation to a claims company’

When Telford Payne saw an advert on social media in 2018 about mis-sold PPI policies, he wondered whether he might be eligible for compensation.

He used a claims management firm to lodge a claim against M&S Bank for a Payment Protection Insurance (PPI) policy that came with his credit card.

Payne, 77, a retired business owner from Abbots Langley in Hertfordshire, was one of about 64 million people mis-sold these insurance policies.

Four months after asking a claims firm to investigate his case he heard back — he had won £7,800 in an out of court settlement. But the firm took a 32 per cent cut at £2,500, leaving him with £5,300. “It was a blow losing that much but I knew what the deal was,” Payne said.

“I didn’t want to make the claim myself out of laziness. I had a business at that time, I was very busy, and I wanted someone to get on with it for me.”