Volkswagen has been forced to pay customers £21.5m in compensation on top of a fine of £5.4m for failing to treat struggling customers fairly, including repossessing vehicles from people who had attempted suicide or were caring for sick relatives.

The UK financial regulator, the Financial Conduct Authority (FCA), said 110,000 customers had suffered detriment because of the unfair actions of Volkswagen Financial Services (VWFS), which is wholly owned by the German carmaker.

The vast majority of new cars in the UK are bought using some form of finance, and much of it is offered through “captive” companies owned by carmakers.

Such companies owned by the likes of Ford, Stellantis and Volkswagen are major UK lenders, and tend to be very profitable. VWFS provides finance across Volkswagen Group, which includes Audi, Skoda and Porsche, and made profits of £276m in 2023 while funding 400,000 vehicles worth more than £10bn in the year.

However, the FCA detailed a litany of failures by VWFS after it looked into the treatment of customers in financial difficulty. The action covers the period from 2017 to July 2023, including the Covid pandemic and the subsequent cost of living crisis, when many households were facing severe financial difficulties through no fault of their own.

The FCA is also looking into separate complaints that car dealers overcharged customers.

Under UK consumer laws, lenders have a duty to treat customers fairly when they say they are struggling to make repayments. However, the consequences of VW’s actions included “exacerbating stress and anxiety for customers who were already struggling with their mental wellbeing” and taking cars away from people who relied upon them for work.

In one example, a parent told the company of a customer’s suicide attempt “owing to stress and financial struggles” on top of a battle over child custody. He said VW’s treatment was making the situation worse, including sending a threatening letter two weeks after a suicide attempt.

Agents displayed a “lack of empathy” in phone communications, including one who sarcastically reminded the customer of the number of days in a month, and another who put him through to departments that could not help him. The company acknowledged that he was vulnerable only after chasing him for 11 months.

Another customer asked for breathing space while going through a divorce and self-isolating during the pandemic while helping to care for a relative with cancer. “VWFS did not engage with that email in any substantive way,” the FCA said.

VWFS avoided a higher fine of £7.7m as it co-operated with the investigation. It has also implemented a new debt-collection model.

Therese Chambers, a joint executive director at the FCA, said that for many people, “a car is not a ‘nice to have’ but a necessity for work or for family life”.

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“Volkswagen Finance made tough personal situations worse by failing to consider what those in difficulty might need,” she said. “It is right it compensates those who suffered. This fine and redress should send clear signals to lenders that they need to properly support those in financial difficulty.”

A VWFS spokesperson said: “We recognise our shortcomings in these past cases and have made significant adjustments over recent years to ensure that we are always delivering the right level of service.

“We are in the process of concluding our remediation efforts as we continue to provide goodwill payments to affected customers and apologise for any detriment caused.”

• In the UK, Samaritans can be contacted on 116 123 and the domestic abuse helpline is 0808 2000 247. In Australia, the crisis support service Lifeline is on 13 11 14 and the national family violence counselling service is on 1800 737 732. In the US, the suicide prevention lifeline is at 988 and the domestic violence hotline is 1-800-799-SAFE (7233). Other international helplines can be found via www.befrienders.org