Motor finance lenders brace for legal battles amid redress spat
Motor finance lenders have been sent a major warning over a potential influx of legal battles if the UK’s financial watchdog fails to “genuinely compensate” consumers.
Britain’s top banks were thought to have been granted some reprieve earlier this year after the Supreme Court sided with upheld the appeals of two lenders in the landmark car finance scandal.
But the second half of the year brought a series of sharp turns in the saga, with the Financial Conduct Authority’s (FCA) redress scheme sparking backlash.
The watchdog was forced to extend the consultation on its motor finance scheme after a number of banks hiked their provisions and took a swing at the regulator for a “disproportionate” scheme.
Meanwhile there was equal backlash on the consumer front, with the All-Party Parliamentary Group (APPG) on Fair Banking blasting the City watchdog for a “£4.4bn billion gap” in the proposed scheme.
Fresh data has also revealed consumers are ready to take the row back to the courts if they are unhappy with the final details of the redress scheme, which are expected to be released in early 2026.
Only one per cent of consumers ruled out going to court, while one in five said they would lodge a legal claim for any amount above the FCA scheme level, if it proves insufficient.
Nearly 50 per cent said they would require at least £2,000 more than the £700 per agreement originally proposed by the watchdog.
Motor finance lenders on hook for £11bn
Alex Neill, co-founder of Consumer Voice said, “Consumers are willing to use the regulator’s redress scheme, but they won’t accept being short-changed. The FCA must act now to deliver a scheme that genuinely compensates consumers.”
The FCA’s scheme – in it’s current capacity – orders lenders to pay £11bn in compensation to consumers.
It led to Lloyds Banking Group – which owns the UK’s largest car finance provider Black Horse – hiking provisions to £2bn from £1.2bn. The lender has also refused to rule out a legal challenge should changes not be made.
Charlie Nunn, the group’s boss, has warned the motor finance redress would “potentially take 20 years of profitability off the car finance industry.”
Santander UK pulled the plug on its third-quarter results in October, citing uncertainty in the motor finance sector, as bank chief Mike Regnier called for the government to consider stepping in to help mediate.
He warned if the government does not intervene “the unintended consequences for the car finance market, the supply of credit and the resulting negative impact on the automotive industry and its supply chain could significantly impact jobs, growth and the broader UK economy.”
FTSE 250 lender Close Brothers near-doubled its funds set aside to £300m and Barclays almost quadrupled its provisions to £325m.
A key crux on the row – which centres on ‘secret’ commission agreements between lenders and brokers – covers the FCA’s interpretation of “unfairness” after the top Court sided with the case of one claimant finding his outsized commission fee was “unfair”.