The UK car finance industry could face an £18billion crisis over commission abuse in what is set to become one of Britain’s largest financial scandals to date.
The warning comes after the industry was rocked by a Court of Appeal ruling which deemed hidden commissions on car loans “unlawful” and as a result the UK regulator, the Financial Conduct Authority, has demanded urgent action.
The crisis comes as banks simultaneously confront a separate £18billion class action lawsuit linked to Payment Protection Insurance (PPI) commission charges, threatening a “total meltdown in financial services,” according to Shore Capital analyst Gary Greenwood.
But the combined impact of both scandals could rival the original PPI crisis, which saw more than £38billion paid in customer compensation, making it the costliest scandal in British banking history.
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Martin Lewis, founder of Money Saving Expert, warned that the car finance issue could reach “PPI scale of payouts” with drivers urged to send in complaints to the regulator sooner rather than later.
The Court of Appeal stated customers should have been told all material facts, including commission amounts and calculation methods before signing up to car financing.
This decision applies to both fixed commission and discretionary commission arrangements in motor finance agreements, with the latter having been banned by the FCA in 2021.
Lewis highlighted the widespread impact, writing on X that until the last couple of weeks “we were only talking about possible refunds” where people had hidden Discretionary Commission Arrangements (DCAs) which meant dealers could up interest to get paid more.
The consumer champion added that this development “potentially more than doubles the number of people involved” and poses “a substantial threat to the car finance industry” as it opens to the floodgates for more people to claim compensation.
Earlier this week, the FCA announced plans to consult on extending the time firms have to respond to car finance complaints.
The regulator has conducted extensive industry engagement, including discussions with 63 firms and hosting an industry roundtable.
The proposed extension would give firms more time to handle the expected surge in complaints efficiently and prevent “disorderly, inconsistent and inefficient outcomes.”
The FCA expects to publish its proposals within two weeks, with the complaint extension likely to be in place by mid-December 2024.
Martin Lewis warned car finance scandal could ‘more than double’ the number of people involved
PA
Stephen Haddrill, Director General of the FLA, called it “a sensible move” but emphasised that “restoring legal and regulatory certainty to this market will require an expedited path to the Supreme Court.”
The extension will cover at least the period until the Supreme Court decides whether to grant permission to appeal.
The crisis has already wiped billions off bank valuations, with major institutions forced to set aside hundreds of millions for potential claims.
Fitch, the credit rating agency, has warned that UK banks could face pressure from the Court of Appeal ruling, which significantly increases the likelihood of a compensation scheme.
Now, the FCA has pledged to write to the Supreme Court requesting a swift decision on whether to grant permission for appeal. If permission is granted, the FCA has indicated it may intervene to share its expertise with the Court.
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The scale of the issue is significant, with FLA members having provided £113bn in The FCA is currently reviewing how the Court of Appeal judgment affects its ongoing investigation into historical discretionary commission arrangements in motor finance.
A decision from the Supreme Court on whether to hear the appeal is expected in early 2025.
