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

The boss of the City regulator has said that a landmark Court of Appeal judgment on motor finance was likely to mean that many borrowers could be in line for compensation.
The car loan industry has been thrown into turmoil since the court ruled late last month that commissions paid by lenders to car dealers arranging motor finance were unlawful if they were not properly disclosed to consumers. 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 as far back as April 2007. The recent judgment widens the problem facing the industry, however, and has pushed up estimates for the size of the potential compensation crisis.
The credit rating agency Moody’s said on Tuesday that redress costs could reach £30 billion and Santander UK revealed on Wednesday that it was setting aside £295 million to cover the costs of the scandal.
The industry is now looking to the Supreme Court for clarity after the two lenders at the centre of the ruling, Close Brothers and FirstRand, said they intended to appeal to the UK’s highest court.
Nikhil Rathi, the FCA’s chief executive, signalled on Thursday that the court’s judgment as it stood may pave the way for a flood of consumer 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.”
The regulator said that it was pushing ahead with a previously announced proposal to give lenders more time to handle the expected flood of complaints arising from the court’s decision.
Firms typically have eight weeks to respond to a consumer grievance before a customer can take their complaint to the Financial Ombudsman Service. In the case of discretionary commissions, which are the focus of the FCA’s inquiry, firms have been given until December next year to respond while the regulator carries out its review.
The watchdog is also planning an extension for complaints involving non-discretionary commissions, which have been dragged into the scandal by the court ruling.
It said on Thursday that it was consulting on two options. The first is a pause until next May, which is when the regulator expects to give an update on its inquiry and also 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.
Two lenders embroiled in the scandal, Close Brothers and Investec, warned of the cloud hanging over the industry. Mike Morgan, the finance director of Close, said the situation was causing “significant uncertainty”.
Shares in the merchant bank have tumbled by more than 70 per cent so far this year amid investor fears about its exposure to the scandal. This has prompted it to take a series of measures to bolster its capital position by £400 million as it prepares for any financial hit.
It has yet to make a formal provision to cover compensation costs, however, and it stuck with this position on Thursday.
Close Brothers had temporarily 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”.
It added: “We are updating our documentation and processes to ensure disclosure of commission amounts on finance agreements and obtain full customer consent for all necessary issues, including credit broker commissions, before customers enter into credit agreements.”
Investec, which had previously set aside £30 million to cover the costs of the scandal, said it was leaving this provision unchanged but added: “The ultimate financial impact of the Court of Appeal decision and ongoing FCA investigation into motor commission could materially vary, pending further guidance from the FCA or the outcome of the intended appeal to the UK Supreme Court.”