The total compensation bill for undisclosed loan commissions charged on car and other loans could potentially hit £30 billion, according to recent estimates. Court cases have revealed that millions of individuals purchasing new cars were unknowingly charged commissions on loans.
It’s also suggested that commissions on other types of loans may have been illegally applied. This situation bears similarities to the Payment Protection Insurance (PPI) scandal where insurances were mis-sold alongside various loans.
Leading credit agency Moodys, which assesses the creditworthiness of companies including those involved in providing these loans and collecting the commissions, has provided new estimates regarding the total figure involved. Major car finance lenders such as Lloyds Banking Group, Barclays and Santander UK are expected to bear the brunt of the costs, with Santander UK recently announcing it has earmarked £295 million for redress.
Moodys suggests that smaller firms and the financing divisions of Ford and Volkswagen could face “a more significant hit to earnings and capitalisation”. The agency’s experts also caution that last month’s Court of Appeal ruling could exacerbate the issue for banks if it means that actions to repay undisclosed commissions could extend beyond car loans.
The motor finance sector has been feeling the heat since the Financial Conduct Authority (FCA) put an end to discretionary commissions in car loan agreements at the start of 2021. The regulator took action over concerns that these commissions, which lenders paid to car dealers or credit brokers for arranging loans, were leading to unfair practices by incentivising higher interest rates for borrowers.
As consumer grievances have piled up over the years, the FCA announced in January a comprehensive review of such commissions dating back to April 2007. This ongoing investigation has sent shockwaves through the industry and fuelled speculation that the watchdog might compel car loan providers to issue compensation to customers.
In July, the regulator indicated that this result was “more likely than when we started our review”. Credit rating agency Moody’s estimates that the industry could face redress costs ranging from £8 billion to £21 billion. Following last month’s court decision, which is yet to be confirmed, the potential bill could increase by another £9 billion, as the ruling extends to all types of commission beyond just the discretionary ones under the FCA’s scrutiny.
The court has delivered a landmark ruling, determining that any commission not fully disclosed to borrowers is unlawful, and lenders must refund consumers. This decision raises the standard for commission disclosures well above current regulations and could trigger a new surge of consumer complaints.
Close Brothers and FirstRand’s Aldermore, the lenders at the heart of this case, are planning to challenge the verdict in the Supreme Court. Meanwhile, the industry is reeling from the implications of the judgment, with some finance providers halting their car loan services to ensure compliance.
While most banks and car manufacturers’ finance divisions have not yet reserved funds for potential motor finance compensation, Lloyds has set aside £450 million. Santander has allocated £295 million, which “includes estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions”.
The bank also noted: “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.”