Car Finance Scandal Could Cost Lenders Billions

A newly emerging scandal in the car finance industry could result in compensation payouts that rival the infamous payment protection insurance (PPI) debacle, according to recent reports. More than 23 million people in the UK believe they may be entitled to compensation due to mis-sold car loans, with claims potentially totalling as much as £30 billion. The controversy centres on discretionary commissions paid to car dealerships by lenders, which were not disclosed to customers at the time of purchase.

Between 2007 and 2021, millions of car finance agreements, including leases and loans, were arranged with undisclosed dealer commissions. These commissions, banned in 2021 by the Financial Conduct Authority (FCA), allowed lenders to incentivise dealers to sell finance products, often at the consumer’s expense. The FCA is now reviewing these agreements and could potentially set up a formal redress scheme to deliver compensation directly to consumers.

Despite the FCA’s efforts, there is widespread scepticism about lenders’ willingness to act fairly in processing redress claims. A recent survey conducted by Find Out Now for the law firm Slater & Gordon revealed that just 23 per cent of respondents trust lenders to thoroughly review records and provide full compensation. This lack of trust has fueled the demand for a robust regulatory scheme to ensure fair payouts without forcing claimants to rely on third-party firms.

Slater & Gordon itself has reported high interest in the case, with 200,000 clients already pursuing claims. The firm has expressed concern that poorly designed compensation schemes could leave many disappointed. Public expectations are running high following heavy advertising by claims management companies on TV, social media, and radio. There is a real risk of prolonged legal battles and dissatisfaction if a transparent, efficient process is not implemented.

Lenders have already set aside £1.7 billion to cover compensation costs, but analysts suggest the true financial impact could be far greater. Some estimates by Moody’s suggest the total could reach up to £30 billion, placing this scandal on the same scale as the PPI payouts, which cost UK banks £50 billion over a decade. Much will depend on the imminent Supreme Court decision, expected this month, which may widen the scope of compensation to include leasing agreements across various asset classes.

As it stands, public and legal pressure is mounting for swift action and clear resolutions. Without it, the industry could face years of disputes, eroding consumer trust and damaging lenders’ reputations even further. The FCA has emphasised its commitment to righting the wrongs of the past, but there are clear challenges ahead in settling the claims efficiently and equitably.