The UK financial watchdog has revealed the extent of its investigation into historical commission agreements which led to consumers paying more than they should have in transactions dating back to 2007.
The Financial Conduct Authority clarified on Wednesday the timeline for an investigation launched earlier this week into historical interest linked deals by motor finance companies. The FCA banned the discretionary Commissions in 2021. They were a way for car finance brokers to increase interest rates.
Shares in Lloyds Banking Group fell more than 2% after the FCA clarified its position, while those in Close Brothers, a specialist lender, dropped nearly 3%.
Jefferies estimates that Lloyds, which owns Black Horse – the UK’s biggest car finance lender – could face a bill totaling £1.8bn.
Analysts said that other lenders, including Barclays, Santander, were likely to also be affected. NatWest, however, was unlikely to experience a material impact due to its low exposure to this sector.
The Financial Ombudsman Service began overseeing consumer credit in 2007. By 2021, the watchdog will include all deals between that date and the present. This has led experts to raise estimates for the total cost of redress.
Analysts at Jefferies predict that the industry’s total bill could be around £13bn. This is up from the previous estimate of £4bn.
Kate Robinson, principal of regulatory consultancy Avyse Partners, said that “Historically these motor finance companies offered discretionary commissions whereby they would set a rate but give the broker the opportunity to decide which rate the customer receives.” If you were a customer, it is possible that you would have been charged higher rates for the loan in order to increase the commission of the broker.
Robinson and other experts compared the investigation to the Payment Protection Insurance scandal that dates back to 1990s, when banks missold insurance policies to millions of clients, leading to banks paying billions of pounds in fines and compensation claims.
Simon Evans, the head of Consumer Redress Association (a trade association for claims management firms), said that the FCA announcement was “good” news for consumers.
Evans stated that “all consumers who have been affected should be given the same opportunity to receive compensation and redress, whether they were affected by the problem in 2007, 2009, or 2013”.
Black Horse stated: “We will be working with FCA to review their decision.
Close Brothers has declined to comment.