UK auto lenders could face £13bn bill after FCA probe into commissions

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

British auto lenders could face up to £13bn in compensation payouts after the UK financial watchdog set out the length of a probe into historic commission agreements that allegedly led to consumers overpaying in deals dating back to 2007.

The Financial Conduct Authority on Wednesday clarified the timeline of an investigation it launched earlier this month into historic interest-linked deals offered by motor finance companies. The so-called discretionary commissions gave car finance brokers and dealers an incentive to raise interest rates on customer deals and were banned by the FCA in 2021.

The FCA’s clarification sent shares in Lloyds Banking Group down more than 2 per cent while shares in specialist lender Close Brothers fell nearly 3 per cent.

Analysts said Lloyds — which owns Black Horse, the UK’s largest car finance lender — is particularly exposed to an influx of compensation claims, with Jefferies estimating the lender could be hit with a total bill of £1.8bn.

Other lenders including Barclays and Santander were also likely to be affected, analysts said, while NatWest was unlikely to feel a material impact because of its low exposure to the sector.

The watchdog said its probe would include deals made between 2007 — when the Financial Ombudsman Service first started overseeing consumer credit — and 2021, leading experts to increase estimates of the total redress cost for lenders.

As a result, analysts at Jefferies anticipate the total bill for the industry could mount up to about £13bn, up from previous estimates of about £4bn, based on estimates that consumers overpaid a total of nearly £7bn in the period.

“These motor finance firms were historically offering discretionary commission whereby they set a rate and gave the broker an opportunity to determine which rate is given to the customer,” said Kate Robinson, principal at regulatory consultancy Avyse Partners. “If you’re a customer, you could have been charged a higher rate for the lending in order to increase the broker’s commission.”

Robinson and other experts have likened the probe to the payment protection insurance scandal, which dates back to the 1990s when banks mis-sold insurance to millions of customers, leading banks to later pay billions of pounds worth of fines and customer compensation claims.

Simon Evans, head of the Consumer Redress Association, a trade body for claims management companies, said the FCA’s announcement was “good news” for consumers.

“All the consumers that have been affected deserve the same chance to be compensated and redressed whether they were affected in 2007, 2009 or 2013,” Evans said.

Black Horse said: “We are currently reviewing the FOS decision and will work collaboratively with the FCA on their upcoming review.”

Close Brothers declined to comment.

Bonus season — are you headed for a payout or a doughnut?

For the third year in a row, the Financial Times is asking readers to confidentially share their 2024 bonus expectations, and whether you intend to invest, save or spend the cash. Tell us via a short survey