The UK car finance industry could be heading towards a financial storm reminiscent of the Payment Protection Insurance (PPI) scandal.
A recent appeals court ruling held car dealerships and lenders liable for not disclosing commissions to customers, a precedent that could unleash billions in damages claims.
For decades, the PPI hounded UK banks, ultimately costing them around £50bn in fines and compensation. Now, analysts fear that auto financing will follow a similar path. The Financial Conduct Authority (FCA) began investigating possible car finance commission fraud in January, with banks such as Lloyds, Close Brothers and Barclays making provisions in anticipation of compensation claims. The ruling has since raised the stakes, with the potential industry-wide cost now estimated at between £6bn and £16bn, according to Shore Capital.
Banks and car dealerships are now required to disclose commissions to customers and obtain explicit approval, which has led to operational disruptions, manual processing of financing offers, and temporary suspension of lending by some banks. The Finance and Leasing Association (FLA) warns that claims management companies could exploit this legal uncertainty, reflecting the significant rise in PPI claims.
Lenders are already preparing for potential losses. RBC Capital Markets has increased its estimated compensation for Lloyds from £2.5bn to £3.2bn, while Santander UK’s costs are expected to rise from £1.1bn to £1.4bn. Lloyds shares have fallen by more than 10%, losing around £3bn of their value, while Close Brothers has seen its shares fall by almost 70% this year.
This latest challenge could extend beyond car financing to other financial products with undisclosed commissions. Claims for compensation could continue to mount if the Supreme Court upholds the ruling, putting further pressure on British banks and sparking a new wave of claims and regulatory scrutiny.