Regulator warns firms over provisions for motor finance claims

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The Financial Conduct Authority (FCA) has written to motor finance firms to “remind them they must maintain adequate financial resources at all times.”

The regulator announced the move this morning after months of speculation about the scope of its investigation in motor finance discretionary commission arrangements (DCA) and the financial impact it may have on the companies required to provide compensation.

It said it had “observed firms taking different approaches to account for the potential impact of previous use of DCA on their financial resources.”

Consequently, the FCA stated that it wanted to remind firms that “they must maintain adequate financial resources at all times.”

This could include “planning for any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints.”

The update from the regulator followed the announcement earlier in the week that Barclays had commenced judicial review proceedings of the Financial Ombudsman Service’s decision to uphold a complaint relating to DCAs.

The FCA’s announcement back at the beginning of the year that it would be investigating DCAs after it officially banned them in 2021 ignited a debate in the financial sector as to which companies could be most exposed and how much it could cost providers to put right.

Initially, investment bank RBC said the motor finance industry could be liable for up to £8bn. However, it later revised this number to £16bn.

Lloyds, the owner of the UK’s largest auto lender, Black Horse, has made a £450m provision for the potential impact of the review, which it said included “estimates for costs and potential redress”. But this figure could rise to £2bn. The bank won’t know the full figure until September.

Meanwhile, shares in Close Brothers have collapsed by more than two-thirds since the FCA’s review was published. The company, one of the UK’s oldest merchant banking groups, could face up to £200m in compensation payouts, according to analysis. It has already scrapped its dividend for 2024 to help fund the redress and could put 2025’s distributions on ice as well. The group has laid out plans to bolster its capital position by £400m to give it enough headroom for compensation.

Other providers, which have claimed to have no exposure to the DCA investigation, have also warned about higher costs. Specialist auto and property lender S&U said earlier this week that while it never engaged in DCAs, it had been hit by a £8.2m jump in provisions made on an estimate of future cash flows under IFRS 9 accounting rules, as well as FCA inquiries into “professional fees”.

There will likely be further uncertainty in the sector over the next few months as the FCA moves ahead with its investigation into motor finance. The regulator said this morning that it will set out its next steps “by 24 September 2024 at the latest, and, as we have indicated previously, if necessary, we will extend our review and the complaint pause currently in place.”