Motor finance scandal could cost as much as £50bn payment protection insurance debacle

The scandal in the motor finance industry could end up costing as much as the £50billion payment protection insurance (PPI) debacle more than a decade ago, the City watchdog has admitted.

Stephen Braviner Roman, legal director at the Financial Conduct Authority (FCA), told MPs it would be ‘premature’ to say that the hit to lenders would not reach the same level as PPI.

That implies an even bigger potential cost than the highest estimate so far – from credit ratings agency Moody’s, which has suggested the total industry could be on the hook for as much as £30billion.

Hundreds of thousands of customers have complained about the way car dealers sold loans to finance the purchase of vehicles. 

The complaints centre on the practice of dealers receiving a commission from lenders for selling those loans.

Earlier this year, the FCA began a probe into customers being overcharged as a result. It centred on the now-banned use of ‘discretionary commission arrangements’ (DCAs), where dealers were rewarded with higher commissions the higher the rates were on the loans.

But a Court of Appeal ruling in a separate case in October widened the scope of the scandal, leaving the industry stunned.

The court said it was unlawful for dealers to receive a commission from lenders without receiving the informed consent of the customer.

Crucially, the ruling covered not just DCAs but also fixed commission payments, dramatically adding to the potential scale of the scandal.

Lloyds Banking Group is among the lenders facing a potential major bill for compensation and has set aside £450million to cover the cost. Santander UK, meanwhile, has set aside £295million.

Two smaller lenders, Close Brothers and Investec, have also revealed that they continued to face uncertainty over the impact of the scandal.

Earlier this year, before the ruling, FCA boss Nikhil Rathi sought to play down comparisons with PPI. 

But yesterday, Braviner Roman told MPs on the Treasury select committee: ‘The scale of the problem that we were anticipating and we were investigating has undoubtedly expanded with the Court of Appeal decision.’

That decision is subject to a possible appeal to the Supreme Court so may not be the ‘final word’, he said.

He added: ‘We’ve previously said that looking at DCAs alone, we do not think it’s the scale of PPI.

‘But that was when we were looking at DCAs alone, so it would be premature to say it’s definitely not the scale of PPI now.’

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