Millions of drivers could be in line for a payout, it has been claimed, after the UK financial watchdog opened an investigation into whether consumers had been unfairly charged inflated prices for loans on new and secondhand cars.

The Financial Conduct Authority said on Thursday that it had decided to examine whether a compensation scheme was needed to deal with alleged large-scale mis-selling in the £50bn-a-year motor finance sector.

Martin Lewis, a consumer champion, said the move could lead to “the new PPI” – a reference to the multibillion-pound payment protection insurance scandal.

High street banks such as Lloyds Banking Group, Santander and Barclays are – or have been – big players in the UK motor finance market. As with the PPI debacle, any finding of widespread mis-selling could result in car finance sellers facing big bills for compensating customers.

In recent years 80% to 90% of new cars and an increasing number of used vehicles have been bought with finance agreements, which include personal contract purchase (PCP) plans and hire purchase. Many involve the customer paying a deposit and a monthly fee, with interest, before later deciding whether to buy the car or swap to a different vehicle.

But complaints from consumers have surged after the FCA clamped down on the way car dealers and brokers earn commission on sales. In January 2021, the regulator banned agreements where firms were able to receive commission linked to the interest rate that customers paid, because it gave brokers and dealers an incentive to increase people’s costs.

The FCA said that there had been a “high number” of complaints from people who took out car finance prior to the ban who believed they were being charged too much, and added that most of these had been rejected by companies.

However, the Financial Ombudsman Service recently ruled in favour of complainants in two cases, while some consumers have won county court cases, so the FCA said it was using its powers to investigate.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way,” the regulator said.

Both of the ombudsman rulings state that the divisions of UK banks involved “did not act fairly and reasonably” in their dealings with the customer.

One of the rulings required Black Horse, part of Lloyds Banking Group, to pay compensation to “Mrs Y”, who took out a hire purchase agreement to buy a used car in 2016. Mrs Y paid 5.5% interest, but the agreement could have been set up with a 2.49% rate, said the ombudsman.

The other ruling requires Barclays Partner Finance – part of the Barclays group – to pay compensation to “Miss L”, who took out a conditional sale agreement (similar to hire purchase) to buy a used car in 2018. Miss L paid 4.67% interest, but the the agreement could have been set up with a rate of 2.68%.

Black Horse, Santander and a specialist, MotoNovo, reportedly account for 57% of the UK’s car finance sector.

It is understood that the vast majority of the complaints to the ombudsman have been submitted on people’s behalf by claims management firms and law firms, which typically take a cut of any compensation offered if the claim succeeds. The FCA announcement could trigger a renewed PPI-style campaign in which claims firms target people who may have been mis-sold products.

Lewis, the founder of MoneySavingExpert.com, said the FCA announcement “may mean a payout for millions who bought a car/van on motor finance before 2021”. He estimated that compensation could read a “PPI-type scale” of £40bn.

Lewis predicted that the FCA would ultimately either set up a compensation scheme where it ordered all companies to pay redress to every affected customer, even if they had not complained, or publish rules under which companies must pay out redress based on a set formula to those who complained.

The Finance & Leasing Association, a trade body for the motor finance sector, said it welcomed the announcement, adding: “We will work with the FCA over the coming months to resolve this issue.” However, it also said that “speculative and unfounded complaints issued by claims management companies have congested what should be a smooth, prompt and clear process”.