Analysts have estimated that banks could be liable for a compensation bill of £10 billion due to unfair car financing deals.
The Financial Conduct Authority announced last week that it will investigate whether people who take out loans before the end of January 2021 are unfairly being charged higher interest rates as a result of commissions paid to car dealers.
The FCA reports that this model, where dealers could set the interest rate for borrowers, was used in just under 40% of all car financing between 2013 and 2016.
Numis analysts estimated that Lloyds Banking Group and other banks could be on the hook for a compensation bill of up to £10 billion if FCA finds evidence of widespread misconduct. Royal Bank of Canada analysts estimate the figure to be between £2 and £8 billion.
According to the Finance & Leasing Association, (FLA), 93 percent of new cars purchased are financed. Finance is the second most popular household borrowing method after credit cards with almost £40 billion in loans per year.
Two decisions of the Financial Ombudsman Service, published last week by Barclays and Lloyds, ordered them to refund more than £1,000 in excess interest payments that they made when compared to if they were charged at a lower rate.
In both cases, the complainants claimed that the commission was concealed and they were not aware they had paid higher interest rates which were then paid to the dealer in commission. The FCA said that by banning discretionary commissions, consumers could save £165,000,000 a year on lower repayments.
Numis estimates Lloyds could be facing a compensation bill in the amount of £1.5 billion. Lloyds loaned £30billion to consumers through Black Horse (its car finance division) between 2014 and 2020. Santander, Close Brothers and Barclays are other financial firms that have large car financing arms. Barclays closed its motor finance division in 2019.
Numis admitted that “it is very difficult to determine the potential costs, given the lack clarity about what the FCA decides and the lender’s response to the FCA decision”. The FCA anticipates that its investigation will last for 37 weeks. It will then decide what to do next after reaching a conclusion.
Since September 2022, more than 16,000 complaints were made to the Financial Ombudsman Service. Most of the complaints have come from claims companies who believe that undisclosed fees could be similar to misselling scandal which cost banks £38.4billion.
Lloyds, Britain’s largest bank, has paid out more than 20 billion pounds sterling in compensation to customers who were mis-sold PPI insurance policies.
Numis, however, estimated that the bill for any mis-sold car finance would be lower because the FOS ruled that the two borrowers only should be compensated for their extra interest, and not for the total cost of the finance.
Black Horse stated: “We will be working with FCA to review their decision.
The FLA stated: “We will be working with the FCA in the coming months to solve this issue.”