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British auto lenders are braced for more than £1bn in compensation payouts after the UK’s top financial regulator launched an investigation into historical commission agreements by car dealers stretching back a decade.
The Financial Conduct Authority said on Thursday it would investigate interest-linked deals offered by motor finance companies following a surge in customer claims, which could lead to redress that compliance experts said echoed the payment protection insurance scandal.
The PPI scandal dates back to the 1990s when banks mis-sold a type of insurance product to millions of customers. Banks were later hit with billions of pounds worth of fines and customer compensation claims.
In 2021, the FCA banned discretionary commission arrangements, where car dealers are able to set the interest rates in customer contracts. The FCA said that the arrangements gave car finance brokers and dealers an incentive to raise interest rates on customer deals.
The regulator said on Thursday that it would review how “several firms” had applied commissions before the ban, after a high number of customer compensation claims for agreements from before it came into effect.
“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement,” the FCA said. “And if necessary, resolve any contested legal issues of general importance,” it added.
The regulator noted that a “high number” of complaints had been rejected by motor finance groups that “consider that they have not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements”.
The FCA declined to comment on the scope of its investigation until it had undertaken work to see how widespread the issue was. However, the regulator said in 2020 that its ban would save consumers about £165mn a year.
If the sum represents the likely annual compensation, then the total bill facing the industry could be about £1.3bn. The FCA began overseeing the motor finance sector in 2014.
The investigation follows two rulings in favour of consumers by the Financial Ombudsman Service, an official body that settles disputes between companies and their customers. The FCA said the cases were likely to prompt “a significant increase” in claims.
One of the upheld complaints was over a 2016 agreement with Black Horse, a subsidiary of Lloyds Banking Group and the UK’s largest car finance lender. The other was made against Barclays Partner Finance, a division of Barclays bank.
A Barclays spokesperson said: “We are working with the Financial Ombudsman Service and FCA to resolve historic complaints relating to these types of loans
“Any customers that are unhappy with the circumstances of their car financing loan should get in touch with Barclays Partner Finance directly so that we can investigate and, where necessary, put things right.”
A Black Horse spokesperson said: “We are currently reviewing the FOS decision and will work collaboratively with the FCA on their upcoming review.”
Kate Robinson, principal at regulatory consultancy Avyse Partners, said she expected complaints management companies to “go absolutely wild”. “It will be like the [PPI scandal].”
The FCA on Thursday asked motor finance providers to pause their handling of complaints for approximately nine months while it investigates the matter.
“It’s very pleasing to finally see the FCA baring some of its regulatory teeth for a change,” said Simon Evans, head of the Consumer Redress Association, a trade body for claims management companies.
He said the issue was reminiscent of the PPI scandal and that auto lenders had used a “similar tactic” by adding a discretionary charge to contracts without consumers’ knowledge and that it had taken place on an “equally large” scale.
