The overall bill could hit £30 billion says rating firm
Major lenders are bracing for a wave of compensation claims following a landmark Court of Appeal ruling that deemed some commission payments to car dealers unlawful.
Santander UK has already set aside £295 million to address potential liabilities, and Nikhil Rathi, the FCA’s chief executive says that the court’s judgment as it stands 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. He added “Most car finance deals arranged through a dealer involve commission. Anyone who is not satisfied with their car finance deal should complain.”
The controversy arose after the court ruled that commission payments made by lenders to car dealers arranging motor finance were unlawful if they were not adequately disclosed to borrowers. This judgment has thrown the industry into disarray, raising concerns over a significant compensation bill. Analysts have warned the fallout could rival the £50 billion payment protection insurance (PPI) scandal.
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The credit rating agency Moody’s has predicted redress costs could reach as high as £30 billion. While larger institutions such as Santander may weather the storm, smaller lenders, including Close Brothers and Investec, face heightened financial uncertainty. Close Brothers has already seen its shares tumble by more than 70% this year due to fears about its exposure to motor finance.
The FCA has been scrutinising motor finance commissions since January, focusing on discretionary arrangements that allowed dealers to influence the interest rates paid by borrowers. However, the recent court ruling extends the issue beyond discretionary commissions, requiring lenders to repay borrowers where any commission was not properly disclosed. The concerns are, however, that this commission dispute might be the thin end of the wedge – and possibly extend into other commission-based sales.
The regulator is also consulting on plans to extend the timeframe for firms to address complaints about both discretionary and non-discretionary commissions. It estimates more than 470,000 complaints could be submitted by the end of January, a figure expected to rise further as the industry awaits clarity from the Supreme Court.
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The ruling’s wider implications have left the industry seeking guidance from the Supreme Court. Close Brothers and FirstRand, the lenders at the heart of the case, have indicated their intention to appeal. The FCA has also called for the Supreme Court to decide swiftly whether it will hear the case – litigation funders are already gathering up clients to launch action.
In the meantime, the judgment has forced several lenders to halt motor finance operations temporarily while reviewing their ramification of the judges’ decision. Close Brothers, which had paused all motor finance activities, announced it had resumed a significant portion of its operations and expected to return to full capacity soon. However, the lender has not yet made a formal provision for compensation, citing ongoing uncertainty.
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The FCA has come under criticism for its handling of the motor finance market, with some arguing that the regulator failed to enforce clear disclosure rules earlier. Stephen Haddrill, director-general of the Finance & Leasing Association, told peers that the lack of regulatory clarity contributed to the crisis, saying, “This mismatch between common law and regulation has fuelled the turmoil.”
Haddrill’s sentiments echo broader concerns about the FCA’s approach to regulation. Critics argue that the authority’s oversight has been inconsistent, leaving firms to interpret unclear rules and consumers vulnerable to unfair practices.
