Millions of pounds of compensation payments are being readied by lenders after an investigation was launched into the mis-selling of car finance over more than a decade.

The issue concerns so-called discretionary commission arrangements (DCAs), sold between 2007 and 2020, that allowed dealers and brokers to adjust lenders’ interest rates to reward themselves with commission payments on hire purchase and personal contract purchase deals.

The Financial Conduct Authority (FCA), which launched the probe, believes that up to three-quarters of deals were on a DCA basis. Up to 10,000 customers had complained about DCAs and two cases had been upheld by the time the FCA called a halt to more appeals while it investigates.

The ongoing probe bears resemblance to the PPI scandal in which lenders have so far paid around £38 billion to over 38 million people who were affected between the early 1990s and 2010.

“If we find widespread misconduct, we will act to make sure people are compensated in an orderly, consistent and efficient way,” the FCA said at the time.

Experts say the FCA’s action suggests the authority suspects lenders may have a case to answer, causing those who believe they are exposed to begin preparing for its next statement in September, when the FCA will explain how consumers can make claims against lenders.

Among those gearing up for the worst is Lloyds, owner of Black Horse, a leading lender of car finance and believed to be most exposed. In February, it revealed it has set aside £450m to cover legal expenses and compensation payouts.

Lender Close Brothers has also confirmed that it is scrapping dividend payments this year as a precaution.

Lenders’ fears and the FCA’s decision to investigate DCAs stem partly from the two claims made by customers and upheld by the Financial Ombudsman.

In one of them, Black Horse was found to have allowed a dealer to set an interest rate between 2.49% and 5.5%, with anything over 2.49% being paid to the dealer as commission. The dealer charged the highest rate of 5.5%, amounting to half of the customer’s total interest bill on the loan.

In addition, the dealer did not tell the customer it had set the interest rate and how much commission it had earned.

The Ombudsman ruled that the dealer’s actions were unfair and ordered that the customer be refunded the interest charged above 2.49% plus paid interest at 8% per year on each overpayment.