British lenders might face a staggering £30 billion compensation bill due to the mounting car finance mis-selling scandal, according to leading credit ratings agency Moody’s. The estimate represents the highest projection to date, suggesting this scandal could mirror the payment protection insurance (PPI) catastrophe that cost the financial sector £50 billion in redress payments.
Major banking institutions like Lloyds Banking Group, Barclays, and Santander UK possess sufficient resources to weather the storm. However, smaller specialised lenders including Close Brothers, Aldermore, Investec, and the financing divisions of Ford and Volkswagen face potentially severe impacts on their earnings and capitalisation.
The crisis deepened following the Financial Conduct Authority’s 2021 ban on discretionary commissions in car loan arrangements. The regulatory body expressed concerns over these commission structures, where lenders paid car dealers or credit brokers for arranging finance, as they incentivised higher interest rates for borrowers.
The situation intensified after a recent Court of Appeal ruling extended beyond discretionary commissions to encompass all types of commission arrangements. The court determined that any undisclosed commission was unlawful, requiring lenders to reimburse affected consumers. This landmark decision has created significant industry uncertainty, with some lenders temporarily suspending their car loan operations.
Moody’s estimates place potential redress costs between £8 billion and £21 billion, with an additional £9 billion possible if the recent court judgment stands. While most financial institutions have yet to allocate funds for potential compensation, Lloyds Banking Group has already set aside £450 million in provisions.
The ripple effects of this scandal could extend beyond automotive finance, potentially affecting other consumer finance sectors where commission payments were involved, creating what Moody’s describes as a “significantly broader and more negative impact” on the lending industry.
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