Banks told to brace for billions in potential car finance scandal payouts

Banks and lenders have been warned to brace for an influx of claims amid an FCA investigation into customers being overcharged for car finance.

The UK’s Financial Conduct Authority (FCA) has published an open letter calling on motor finance creditors to “maintain adequate financial resources at all times [to cover] any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints” — all as part of its ongoing inquiry into industry-wide car finance lending practices.

The investigation has been prompted by so-called ‘discretionary commission arrangements’. A practice that was banned by the FCA in 2021, this allowed firms to artificially adjust interest rates without customers knowing, either to make finance deals look more enticing, or potentially even to generate extra commission.

Having begun its review in January, the FCA is planning to publish its proposed next steps in September, however, there are a couple of potential roadblocks. Firstly, the FCA itself admits that it’s having trouble obtaining all of the relevant data it needs, despite firms involved engaging with the process “constructively”.

Perhaps more crucially, however, Barclays has launched a judicial review against a ruling by the Financial Ombudsman Service. The ruling, made in June of last year, stated that the bank “failed to act fairly and reasonably” after a customer entered a car finance agreement, unaware that it included a £1,600 commission payment to the broker.

While the appeal by Barclays only concerns one case, it has generated what the FCA describes as “some uncertainty” surrounding its investigation. Ultimately, the outcome of a judicial review in the Barclays’ case could have a wide range of implications – Barclays contends that it was not at fault, and if the court agrees it could affect the FCA’s approach to the issue as a whole. 

Still, the FCA continues to ask lenders to set aside cash for potential payouts. Earlier this year, Lloyds ring fenced an extra £450 million for this reason, with data analysts at the RCB (Royal Bank of Canada) suggesting that the total cost to the industry could reach £16 billion.

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