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Millions of drivers could be hit with surprise charges of up to 36% when pursuing car finance mis-selling claims, consumer champion Martin Lewis has warned. His MoneySavingExpert (MSE) website has issued a stark alert following concerns that claims companies are adding substantial fees, including VAT, on top of the percentage cap set by the Financial Conduct Authority (FCA).

The FCA introduced a cap on how much claims management companies (CMCs) can charge for handling these claims. However, a loophole has emerged, allowing them to add Value Added Tax (VAT) on top of this cap, significantly increasing the overall cost for consumers. This means that while the FCA limits the fee to a certain percentage of the compensation, the addition of VAT can push the total fee to a potentially hefty 36% of the payout.

Why are these claims happening? Many drivers who took out car finance agreements before 2021 may have been mis-sold. This often relates to issues with the way commissions were paid to car dealerships, potentially influencing the interest rate charged to the customer. If the dealership received a commission based on the size of the finance agreement, it could have created an incentive to increase the amount borrowed, leading to higher interest payments for the consumer.

The Risk of Unexpected Fees Martin Lewis’ MSE is urging caution. The website highlights that many CMCs are aggressively advertising these claims, sometimes using “highly speculative figures” to entice people to sign up. This can lead to individuals pursuing claims without fully understanding the potential costs involved, especially the VAT element.

What the FCA Says The FCA has acknowledged these concerns, stating: “We've seen law firms and CMCs touting highly speculative figures to sign people up for motor finance claims.” They are currently reviewing the situation and considering ways to address the issue and ensure consumers are protected from unfair fees.

Should You Pursue a Claim? Before signing up with a CMC, it’s crucial to:

• Thoroughly research the claims company: Check their reputation and read reviews.
• Understand the fee structure: Specifically ask about VAT and the total percentage they will take from any compensation. Get this in writing.
• Consider pursuing the claim yourself: You can submit a claim directly to the finance provider without using a CMC. This could save you a significant amount of money. The FCA provides guidance on how to do this.
• Seek independent financial advice: A financial advisor can help you assess your situation and determine the best course of action.

The Bottom Line While the potential for compensation from mis-sold car finance is real, consumers need to be aware of the potential for unexpected fees. Be diligent, do your research, and understand the terms and conditions before committing to a claims company. Martin Lewis’ warning serves as a vital reminder to proceed with caution and avoid potentially costly surprises.