The UK’s financial watchdog has issued a caution to motor finance companies, advising them to set aside funds for potential payouts as it continues its investigation into the sector.
The Financial Conduct Authority (FCA) disclosed that firms have been facing challenges in promptly providing data for the ongoing probe. Approximately 17,000 individuals have already lodged complaints with an ombudsman.
These complaints primarily revolve around commission agreements between lenders and car dealers. Some lenders permitted dealers to adjust interest rates, enhancing the commission they received. Consequently, such arrangements incentivized brokers to inflate the cost of car loans for consumers.
In response to these practices, the FCA banned discretionary commission arrangements in 2021, estimating annual savings of £165 million for drivers, equating to approximately £100-£200 per loan.
The potential compensation costs have drawn parallels to the payment protection insurance (PPI) mis-selling scandal, which incurred substantial losses for banks.
In anticipation of the investigation’s outcome, banking giant Lloyds has allocated £450 million to cover potential liabilities. Lloyds, being one of the major banks, is considered particularly vulnerable as it owns Black Horse, one of the UK’s largest motor finance providers.
Charlie Nunn, CEO of Lloyds, emphasized the need for clarity regarding potential customer losses, welcoming the FCA’s scrutiny to provide transparency for customers and the industry.
Barclays is contesting allegations of unfair commission payments to a car finance broker. One case highlighted by the FCA involves a customer who was found to have been mis-sold car finance by Barclays Partner Finance. The Financial Ombudsman ruled that the bank had not acted fairly, as the customer was unaware of a £1,600 commission included in her package.
Although Barclays is appealing the decision, reports suggest it has complied with the ombudsman’s required award.
The FCA’s update also cited challenges in obtaining necessary information from various companies for the investigation, despite constructive engagement from firms involved.
