FCA could spend £20m on car loan probe after shock court ruling
The Financial Conduct Authority (FCA) could splash £20m on the first stage of its review into car loan commissions, Morning Wire can reveal, reflecting the scale of a scandal that may see lenders forced to pay billions of pounds in compensation.
The City watchdog spent just over £14m investigating the use of now-banned discretionary commission arrangements (DCAs) in the motor finance market between the launch of its probe in January and the end of September, according to data obtained by Morning Wire via a Freedom of Information request.
Based on its current forecasts, total costs will likely not exceed £19.7m by May 2025 – when the FCA plans to set out its next steps in the review.
However, it flagged that the budget could change depending on the fallout from a shock court ruling last month that has sparked fears of a full-blown meltdown of the motor finance industry.
In a case involving “secret” car loan deals, the Court of Appeal ruled on 25 October that a broker could not lawfully receive a commission from the lender without obtaining the customer’s fully informed consent to the payment.
The decision has made it more likely that the FCA will implement a redress scheme for consumers. Meanwhile, lawyers have argued the precedent could broaden the scope of the review and apply to other consumer finance commissions.
Close Brothers and South African bank FirstRand both promised to appeal the judgement.
“The extent to which we will spend at or close to [£19.7m] is not certain because of, amongst other things, whether the Court of Appeal judgement will be appealed to the Supreme Court and the impact of the judgement on our work,” the FCA said.
Potential changes to the regulator’s budget could top up what has already been a multi-million pound payday for top consultancy firms.
The bulk of the FCA’s spending so far is tied to external contracts, particularly two awarded to EY to conduct a so-called “skilled person review” of the use of DCAs across several firms.
PA Consulting and Europe Economics won contracts for analytical support, while the FCA has also engaged Grant Thornton and Yonder Consulting.
Elsewhere, the watchdog has incurred some £2.8m in staffing costs tied to the review.
As part of its work, the FCA is assessing thousands of records spanning between 2007 and 2021, when DCAs were banned.
“The cost reflects the scale of the work, not least the number of firms involved and age of many of their records,” the regulator said.
The FCA did not disclose how many motor finance firms it has engaged with, other than to say it was a “large number”.
‘Severe disruption’
Adrian Dally, director of motor finance at the Finance and Leasing Association (FLA), told Morning Wire that the spending marked “a fraction of the costs” lenders have incurred due to the regulator’s work, including handling more than two million complaints since January.
He added that the ruling risked causing “severe disruption” to the industry and lasting damage to the UK economy.
A slew of lenders temporarily halted new loans shortly after the judgment, while others including Lloyds Banking Group abolished car loan commission payments entirely. Analysts have warned that some firms could exit the sector given their exposure to possible claims.
Roughly 80 per cent of new car purchases in the UK are made using credit, with FLA members issuing £52bn of motor finance loans last year alone.
“If finance isn’t available, for most people that will mean the car doesn’t get sold, doesn’t get delivered,” Dally said.
Having held urgent talks with the Treasury in the days after the ruling, Dally said the FLA is calling on the government and regulator to intervene “to get law and regulation consistent with each other and predictable”.
The trade body is urging the FCA to extend its pause on the eight-week deadline firms have to respond to DCA complaints, currently in place until December 2025, and broaden its scope to include all commission arrangements.
It is also asking for a halt to other court proceedings while the Supreme Court considers the test case and for that process to be expedited in the public interest.
“Our members had a right to expect the FCA’s rules to be a safe harbour and to represent compliance with the law, but that’s proven not to be the case,” Dally said.
Analysts at RBC currently estimate the scandal could force the motor finance industry to pay out up to £23bn in compensation and legal costs. Their forecasts topped out at around £16bn before the ruling.
A redress scheme at this level would be UK banking sector’s biggest since the infamous PPI scandal, which saw banks hand back more than £38bn between 2011 and 2019 over missold payment protection insurance.