Britain’s car finance industry faces unprecedented turmoil following a landmark Court of Appeal ruling that could trigger massive compensation payouts to consumers. The Financial Conduct Authority’s chief executive, Nikhil Rathi, has indicated the potential for widespread claims after the court determined that undisclosed commissions paid to car dealers were unlawful.
The ruling, which encompasses all types of car loan commissions, has sent shockwaves through the financial sector. Credit rating agency Moody’s projects potential redress costs reaching £30 billion, drawing parallels to the £50 billion payment protection insurance scandal. Santander UK has already set aside £295 million to address potential exposures.
Close Brothers and FirstRand, the two lenders at the centre of the ruling, are seeking clarity through a Supreme Court appeal. The FCA’s stance has become increasingly firm, with Rathi explicitly stating that numerous customers who purchased cars using dealer-arranged finance could be entitled to compensation.
The regulatory body has revealed that more than 470,000 complaints about non-discretionary commissions might surface by January’s end. The FCA is currently considering two options: a pause until May, allowing time for Supreme Court appeal permissions, or an extended pause until December 2025, aligning with existing arrangements for discretionary commission complaints.
The market impact has been severe, with Close Brothers experiencing a more than 70 per cent share price decline this year. While they have resumed significant portions of their motor finance operations, they have yet to make formal provisions for compensation costs. Similarly, Investec maintains its £30 million provision but acknowledges the potential for material variations in the ultimate financial impact.
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