A growing scandal over mis-sold car financing could leave lenders facing compensation bills of up to £30bn, according to a warning from leading credit rating agency Moody’s.
This estimate is the highest to date and raises concerns that the issue may mirror the Payment Protection Insurance (PPI) debacle, which ultimately cost businesses around £50bn in compensation.
While major banks such as Lloyds Banking Group, Barclays and Santander UK may be able to absorb the impact, smaller, more specialist lenders – including Close Brothers, Aldermore, Investec, and the financing arms of Ford and Volkswagen – could suffer a “shock”. greater”. Moody’s warned that this affects profits and capitalization.
The car finance industry has come under increasing pressure since the Financial Conduct Authority (FCA) banned discretionary commissions in car loan deals in early 2021. The regulator was concerned that these commissions – which lenders pay to car dealers or credit brokers to arrange financing – were unfair because they It stimulated higher interest rates for borrowers.
Consumer complaints about these payments have mounted, prompting the Financial Conduct Authority to announce a wide-ranging review in January, examining discretionary commissions dating back to April 2007. This ongoing investigation has destabilized the industry, and It raised speculation that the watchdog might force car loan providers to compensate. Affected borrowers
In July, the FCA noted that the prospect of a compensation claim was “more likely than when we began our review”. Moody’s estimates that potential reform costs for the industry could range between £8 billion and £21 billion.
The situation may worsen if the recent appeals court ruling is upheld. Last month, judges decided that any commission that was not properly disclosed to the borrower was illegal, making lenders liable for repaying the money to consumers. The ruling applies to all types of commissions, not just discretionary arrangements under the FCA’s focus, which could add another £9bn to the compensation bill, according to Moody’s.
By setting a higher standard for commission disclosure, the court opened the door to a new wave of consumer complaints. Close Brothers and FirstRand (owner of Aldermore), the lead lenders to the ruling, plan to appeal to the Supreme Court. Meanwhile, the ruling has thrown the industry into turmoil, with some lenders temporarily halting their auto loan operations to ensure compliance.
UK bank Santander postponed its third-quarter results to assess the impact of the ruling, and is expected to release its numbers on Wednesday.
There is uncertainty about the scope of the ruling, with speculation that it could extend to commissions paid in other types of consumer finance. Moody’s warned that if this were the case, it would “result in a broader and more negative impact” on many lenders.
Most banks and automakers’ financial arms have not set aside money to cover potential auto financing payouts. Lloyds Banking Group is one of the few groups to have allocated provisions worth £450 million.
As the industry grapples with the potential financial fallout, comparisons to the PPI scandal have intensified. The size of the potential compensation payments raises serious concerns about the stability of small lenders and the wider impact on the UK financial sector.
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