The UK’s biggest banks are gearing up for yet another fight with regulators over how they’ll compensate consumers who were missold car loans — even after they set aside an additional £1.5 billion to resolve the saga in recent weeks.
Barclays Plc on Wednesday said it had roughly quadrupled the amount of cash it has set aside to compensate customers who were impacted by the scandal. One day later, Lloyds Banking Group Plc saw its pre-tax profit in the third quarter slump 36% because of an additional £800 million charge tied to the matter.
More may lie ahead: After the Financial Conduct Authority’s unveiled its planned redress program, Johannesburg-based FirstRand Ltd. was quick to say the proposal went beyond what it previously expected would be a reasonable outcome. And Banco Santander SA’s UK unit has yet to disclose any change to the £295 million charge it previously took.
Read more: UK Car Finance Industry Faces $11 Billion-$13 Billion Mis-Selling Hit
Even as they took the additional provisions, multiple lenders have signaled they intend to fight the FCA’s plan. Secure Trust Bank Plc said the regulator’s approach was “towards the extreme end of the range of previously expected outcomes,” saying it fails to take proper account of a July Supreme Court ruling that many analysts believed represented a reprieve for lenders.
“As you have seen with increasing provisioning, the FCA’s current proposals break the link between loss and remedy,” said Adrian Dally, director of motor finance at the Finance & Leasing Association, a lobby group for the sector. “The FCA’s criteria for assessing liability is set so broadly that it would also compensate customers who suffered no loss at all.”
The FCA has defended its plan, saying its the quickest and most cost effective way to bring the yearslong saga to a close while giving certainty to consumers and businesses.
“We are open to well evidenced feedback during the consultation period,” the FCA said in a statement. “Recent court judgments show that liabilities exist no matter what. We believe our scheme is the best way to settle the issue for both consumers and firms, and alternatives would be more costly and take longer.”
Increasing Provisions
The charges are the most visible signs of the pain set to hit the wider car finance industry if it ends up shouldering the full £8.2 billion bill for what the FCA calls the industry’s “widespread failures to disclose” hidden charges to customers. That doesn’t even include the £2.8 billion cost of running the refund program, which the industry will also bear.
It’s not just big lenders that are impacted. Smaller lenders like Close Brothers Group Plc, Bank of Ireland Group Plc and Secure Trust Bank have also set aside more provisions this month.
Car finance companies are also expected to shoulder some of that burden. Automakers have finance arms so that they can provide affordable options for customers and boost sales in the process.
The UK finance arm of BMW AG last month disclosed a provision of nearly £207 million. Renault’s RCI Financial Services, which also provides financing options for Nissan vehicles, has set aside £73.6 million, according to accounts published this month.
The additional costs are hitting the industry at a time when they’re already being buffeted from other areas in their business, with a slowdown in China sales, higher US tariffs and weak demand for electric vehicles all taking a toll.
FCA Fight
Lloyds, for its part, declined to rule out the possibility of a future legal challenge to the FCA’s plans. For now, Chief Financial Officer William Chalmers said the bank is focused on engaging with the watchdog during the consultation period, which ends next month. Barclays similarly flagged its intention to engage with the FCA.
FirstRand, which has about 10% market share for car finance in Britain, has previously warned the fate of its UK unit could rest on the regulator’s plans for the redress program. After the FCA’s latest plans were unveiled, it argued what the regulator determined was unfair treatment doesn’t align with the recent Supreme Court ruling on the matter.
“There remains a possibility of legal challenge,” Katie Stephen, a partner at Norton Rose Fulbright said. “Although the bar for overturning such regulatory rule-making is likely to be high, the option remains open should firms feel the final framework overreaches.”
At the heart of the motor finance compensation program are the commissions that lenders paid to car dealers to sell loans. The so-called discretionary commission arrangements were banned by the FCA in 2021. A Supreme Court ruling in August, seen by analysts as a “huge win” for lenders, found that banks should pay only where the most serious abuse is found.
More to Come
Even after the recent charges, there remains a substantial gap between the FCA’s estimated payouts and the cash lenders have publicly earmarked for the compensation program. Some of that shortfall is explained by the huge swathe of firms involved in the scandal that don’t have to disclose.
But some of it might reflect optimism that the current plan will be moderated when the compensation rules are finalized after the consultation.
“We expect that the FCA will need to moderate its approach when laying out its final redress scheme towards the end of this year,” RBC’s Benjamin Toms said in a note to clients earlier this week.
Others think those hopes are misplaced.
“It’s hard to see the net being tightened further,” said Greg Huitson-Little, a partner at Menzies. “Lenders must strike a balance between challenging the FCA to reduce their exposure and accepting the need to provide compensation and move on. The longer this saga continues, the larger the reputational risk.”
Photograph: Cars for sale on a forecourt of a car dealership offering finance for consumers in the UK. Photo credit: Matt Cardy/Getty Images Europe
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