Car finance scandal could cause flood of consumer claims, says FCA

A landmark Court of Appeal ruling on motor finance could lead to a wave of compensation payouts to consumers, the head of the City regulator has suggested.
The car loan industry was thrown into turmoil when the court ruled last month that commissions paid by lenders to car dealers arranging motor finance were unlawful if they were not properly disclosed to borrowers. This judgment, which applies to all types of car loan commissions, has intensified a mounting controversy over the industry.
There were already expectations that lenders could face big redress bills after the Financial Conduct Authority (FCA) announced in January that it was examining discretionary commission arrangements in motor finance deals. The court judgment widens the problem facing the industry, however, and has pushed up estimates for the size of the potential compensation bill.
The credit rating agency Moody’s predicted on Tuesday that redress costs could reach £30 billion, suggesting the problem could develop into a debacle akin to the £50 billion payment protection insurance scandal.
Santander UK revealed on Wednesday that it had earmarked £295 million to cover its potential exposure.
The industry is now looking to the Supreme Court for clarity after the two lenders that are the focus of the ruling, Close Brothers and FirstRand, said they intended to appeal.
Nikhil Rathi, the FCA’s chief executive, signalled on Thursday that the court’s judgment as it stood may result in a flood of payouts. “The Court of Appeal’s ruling means many customers who bought a car using finance through a dealer could be owed compensation,” he said.
The authority added: “Most car finance deals arranged through a dealer involve commission. Anyone who is not satisfied with their car finance deal should complain.”
Firms typically have eight weeks to answer to a consumer grievance before a customer can take their complaint to the Financial Ombudsman Service. In the case of discretionary commissions, firms have been given until December next year to respond while the regulator carries out its review into them.
The watchdog is now also planning an extension for complaints about non-discretionary commissions, which have been dragged into the scandal by the court ruling. It estimated on Thursday that more than 470,000 complaints about non-discretionary commissions might be received by firms in the three months to the end of January.
It said on Thursday that it was consulting on two options. The first is a pause until May, which reflects “how long it may take to hear whether the Supreme Court has granted permission to appeal”. The second is a pause until December next year, in line with its arrangements for discretionary commission complaints.
Separately, two lenders embroiled in the scandal, Close Brothers and Investec, warned of the cloud hanging over the industry. Mike Morgan, finance director of Close, said the situation was causing “significant uncertainty”.
Shares in the merchant bank have tumbled by more than 70 per cent this year amid fears about its exposure to motor finance. It has yet to make a formal provision to cover compensation costs, however, and stuck with this position on Thursday.
Close Brothers had paused all its motor finance operations after the court ruling but said it had “restarted a significant portion of this business and expects full resumption in the very near future”.
Investec, which had previously set aside £30 million for the scandal, said it was leaving this provision unchanged but added that “the ultimate financial impact… could materially vary.”