The UK car finance sector could be heading for a financial storm reminiscent of the Payment Protection Insurance (PPI) scandal.
A recent Court of Appeal ruling found that car dealers and lenders are liable for failing to disclose commissions to customers, a precedent that could trigger billions in damages claims.
For decades, PPI hounded British banks, ultimately costing them around £50 billion in fines and compensation. Now analysts fear that auto financing could follow a similar trajectory. The Financial Conduct Authority (FCA) began investigating possible misleading motor finance commissions in January, with banks including Lloyds, Close Brothers and Barclays setting aside provisions pending compensation claims. This ruling has since raised the stakes, with the potential cost to the entire sector now estimated at £6 billion to £16 billion, according to Shore Capital.
Banks and car dealers are now required to disclose commissions to customers and obtain explicit consent, which has led to operational disruptions, manual processing of financing offers and temporary suspension of lending by some banks. The Finance and Leasing Association (FLA) warns that claims management companies could take advantage of this legal uncertainty, reflecting the rise in PPI claims.
Lenders are already preparing for possible losses. RBC Capital Markets has increased its estimated compensation for Lloyds from £2.5 billion to £3.2 billion, while Santander UK’s costs are expected to rise from £1.1 billion to £1.4 billion. Lloyds shares have fallen by more than 10%, wiping out around £3 billion from their value, while Close Brothers has seen its shares plummet by almost 70% this year.
This latest challenge could extend beyond auto financing and apply to other financial products with undisclosed commissions. Claims for damages could continue to rise if the High Court upholds the ruling, further increasing pressure on UK banks and triggering a new wave of claims and regulatory scrutiny.