Lenders could face £10bn bill over car financing
22 January 2024
Analysts suggest banks could face a £10bn compensation bill for unfair car finance deals. The FCA has announced an investigation into whether loans taken out before January 2021 were unfairly charged higher interest rates in return for higher ‘discretionary commission’ to car dealers.
Discretionary commission was banned in January 2021.
The FCA says discretionary commission applied to around 40% of car finance between 2013 and 2016.
Numis estimates banks, most notably Lloyds Banking Group, could face the £10bn compensation bill if “widespread misconduct” was found. It calculates Lloyds loaned £30bn in consumer car finance between 2014 and 2020 through its Black Horse division, and could face a £1.5bn compensation bill.
However, the bill would be lower for car finance mis-selling than for the £38.4bn PPI scandal, added Numis – following a Financial Ombudsman Service ruling into two banks, Barclays and Lloyds. It decided the borrowers should only be compensated for the extra interest they paid, not the entire cost of their finance.
Car buyers paid an average of £1,100 more interest on a typical four-year, £10k car finance deal when discretionary commission was used, says the FCA.
It is lenders who are on the hook, rather than retailers, because they are responsible for the actions of the retailer under Section 56 of the 1974 Consumer Credit Act. What’s more, it is lenders who would have devised the commission structure for the products.
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