UK Financial Regulator to Reduce Payouts in Car Finance Mis-selling Scandal

The Financial Conduct Authority (FCA) plans to reduce the compensation owed to consumers in a major car finance mis-selling scandal, potentially by as much as £1 billion. This climbdown follows significant lobbying from banks and car manufacturers who warned that the original £11 billion redress program could harm investment in the UK automotive sector.

The Core of the Dispute

The dispute centers around commissions paid by lenders to car dealerships when offering loans to customers. Both the regulator and courts have determined that these commissions were often insufficiently disclosed to consumers, leading to higher interest rates. This issue has negatively impacted the share prices of major UK banks, forcing them to set aside billions in provisions for potential compensation.

Carmakers, including Mercedes-Benz and BMW, have as well allocated over £500 million to cover potential costs related to the scandal.

FCA’s Proposed Changes

The FCA is considering exempting carmakers’ in-house finance arms – known as captive lenders – from compensating customers who were not explicitly informed that their vehicle financing came from a lender with exclusive ties to the dealership. Captive lenders finance over 80% of new car purchases and 40% of used car sales in the UK, and were initially estimated to be responsible for approximately 47% of the £8.2 billion in expected consumer redress, bringing the total scheme cost to £11 billion when including administrative expenses.

The FCA stated to the Financial Times, “We’re carefully considering feedback and decisions on final scheme rules have not been taken.”

Areas of Redress Remain

Despite the potential reduction in payouts related to tied agreements, captive lenders will still be liable for redress in two other key areas: poorly disclosed discretionary commissions (allowing dealerships to increase rates for higher earnings) and high commissions exceeding 35% of the total credit cost or 10% of the loan amount.

Recent Legal Developments

A 2024 Court of Appeal ruling initially threatened lenders with costs up to £44 billion. But, the Supreme Court overturned much of this judgment in August, narrowing the potential financial fallout. The FCA subsequently developed the rules for the redress scheme, prompting banks to increase provisions and criticize the regulator’s approach.

Adrian Dally, director of motor finance at the Financing and Leasing Association, criticized the FCA’s initial proposal, stating, “What the FCA proposed on tied relationships is irrational and doesn’t correspond to what the Supreme Court said.”

Administrative Changes Under Consideration

The FCA is also considering changes to the administration of the redress scheme. Currently, lenders are required to contact all customers who have entered car finance agreements, regardless of eligibility. The regulator has indicated it may allow lenders to contact only those expected to receive compensation.

Lenders have also requested an “implementation period” to prepare for contacting affected parties, a suggestion the FCA is reportedly open to supporting.

Further Reporting

Additional reporting by Kana Inagaki contributed to this article.