The scandal has echoes of the Payment Protection Insurance (PPI) scandal where people were mis-sold insurances alongside a wide range of loans
The total compensation bill for secret loan commissions charged on car and other loans could reach £30 billion, according to new estimates. Recent court cases have confirmed that potentially millions of people buying a new car were hit with commissions on loans that were not clearly revealed to them. And it is possible that commissions on other loans were also potentially illegal.
The scandal has echoes of the Payment Protection Insurance (PPI) scandal where people were mis-sold insurances alongside a wide range of loans. The leading credit agency Moodys, which looks at the credit worthiness of companies including those that were involved in providing these loans and collecting the commissions, has come up with new estimates looking at the total figure involved.
The biggest burden is expected to fall on the shoulders of major car finance lenders, such as the Lloyds Banking Group, Barclays and Santander UK, which has announced it has set aside £295 million to cover the redress bill. Moodys indicated a number of smaller and more concentrated firms and the financing arms of Ford and Volkswagen are threatened with “a more significant hit to earnings and capitalisation”.
Its experts also warned that the problem confronting banks could become more serious if a Court of Appeal ruling last month means that action to repay undeclared commissions could extend beyond car loans. The motor finance industry has been under pressure ever since the Financial Conduct Authority banned discretionary commissions in car loan deals in early 2021.
The regulator was concerned that this type of commission, paid by lenders to car dealers or credit brokers for arranging finance, was unfair because it provided an incentive for borrowers to be charged higher interest rates. Consumer complaints about these payments have mounted in recent years, prompting the authority to announce in January a wide-ranging review of discretionary commissions as far back as April 2007.
This inquiry, which is in progress, has rattled the industry and stoked speculation the watchdog will decide to force car loan providers to compensate borrowers. The regulator said in July that this outcome was “more likely than when we started our review”. Moody’s, which assesses the creditworthiness of companies, reckons this could amount to between £8 billion and £21 billion in redress costs for the industry.
The bill could rise by a further £9 billion if last month’s court judgment is upheld, it added. The ruling widens the problem facing lenders because it applies to all types of commission, not just the discretionary arrangements that are the focus of the FCA.
The judges found that any commission which was not properly disclosed to a borrower was unlawful and that lenders were liable to repay the money to consumers. In doing so, the court has set a much higher bar for the disclosure of commissions that goes beyond existing regulation and has paved the way for a fresh wave of consumer complaints.
Close Brothers and the Aldermore owner FirstRand, the lenders that are the focus of the ruling, intend to appeal to the Supreme Court, which will have the final say. In the meantime the industry has been thrown into turmoil by the judgment, with some lenders temporarily pausing their car loan operations while they ensured their processes complied with the ruling.
Most banks and finance arms of car manufacturers have yet to set aside money to cover any motor finance compensation they might owe. Those that have made provisions include Lloyds, which has earmarked £450 million.
Santander said it has set aside £295m which “includes estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions. There are currently significant uncertainties as to the nature, extent and timing of any remediation action if required and the ultimate financial impact could be materially higher or lower than the amount provided.”
