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The UK’s main financial regulator plans to cut up to £1bn from the compensation owed by carmakers over their in-house lenders’ involvement in a motor finance mis-selling scandal.
The Financial Conduct Authority’s planned climbdown comes after heavy lobbying by banks and carmakers, which have warned the regulator that its £11bn redress programme risks hurting investment in UK auto manufacturing unless it responds to their criticism of the scheme’s design.
The long-running dispute centres on commissions paid by lenders to car dealerships when they offered loans to customers. The regulator and courts have said these were insufficiently disclosed to consumers and incentivised the charging of higher interest rates.
The issue has at times hammered the share prices of Britain’s biggest banks, which have been forced to book billions of pounds in provisions to cover compensation costs. Carmakers such as Mercedes-Benz and BMW have also set aside more than £500mn.
Two people briefed on the FCA’s plans said it was preparing to exempt carmakers’ in-house finance arms from having to pay compensation to at least some customers who were not clearly told that the finance to buy their vehicle came from a lender with exclusive ties to the car dealership.
Many of the big carmakers, including Volkswagen, Stellantis, BMW and Toyota, have their own in-house banking operations — known as captive lenders — to provide financing for buyers of their vehicles.
Captive lenders provide more than 80 per cent of new car finance in the UK and about 40 per cent of finance for used-car sales, according to the FCA.
The regulator has estimated captive lenders would have to pay about 47 per cent of the £8.2bn it expects consumers to receive under the scheme. Including administration costs, the scheme is set to cost lenders £11bn in total.
Inadequate disclosure of “tied agreements” between finance companies and dealerships is one of the three key areas where the FCA has said lenders will have to pay redress to the millions of consumers who took out vehicle finance between 2007 and 2024.
But the captive lenders have argued their loans should not count as tied agreements — at least for new car purchases — as they lend at attractive rates that can be as low as 0 per cent, which carmakers provide as an incentive for people to buy their vehicles.
The FCA said in a statement to the FT: “We’re carefully considering feedback and decisions on final scheme rules have not been taken.”
Captive lenders are still set to be caught by the other two areas in which consumers will be eligible for redress under the FCA’s proposals, which it aims to finalise by next month.
Most redress will still be due for poorly disclosed discretionary commissions, which allowed a dealership to earn more if it put customers on a higher rate. Some will also be due for high commissions worth more than 35 per cent of the total cost of credit or over 10 per cent of a loan.
A 2024 Court of Appeal ruling had threatened to saddle lenders with costs of up to £44bn, but lenders were handed a reprieve in August, when the Supreme Court overturned much of that judgment and narrowed the potential fallout.
Following the ruling, the FCA drew up the rules of a planned redress scheme, causing banks to take extra provisions and claim the regulator had been too heavy handed. In October, the regulator invited feedback on its proposals.
Adrian Dally, director of motor finance at the Financing and Leasing Association trade body, told the FT: “What the FCA proposed on tied relationships is irrational and doesn’t correspond to what the Supreme Court said.”
Two people briefed on discussions with the regulator said the FCA was also drawing up other changes to how the redress scheme is administered.
Under its current proposals, lenders will be forced to contact all customers who have entered car finance agreements, regardless of whether they are eligible for compensation. The people said the watchdog had indicated that it would allow lenders to contact only those who were expected to be entitled to money under the scheme.
Lenders have also been lobbying for an “implementation period” to give them more time to prepare before they start contacting affected parties, an idea that the watchdog has indicated it would support.
Additional reporting by Kana Inagaki
