Car finance review: FCA warns lenders to prepare for potential costs

The City watchdog has written to lenders to warn them to prepare for potential costs, as it conducts a review into complaints about mis-sold car finance.

Car finance application form with some coins, a toy car, some keys and a calculator.
(Image credit: Getty Images)

The Financial Conduct Authority (FCA) is currently investigating the handling of complaints about mis-sold car finance. 

Motorists who purchased a car or van with finance before the end of January 2021 could be due compensation in what is being described as potentially “the new payment protection insurance (PPI)" scandal.

The City watchdog announced its review in January this year, looking into historical commission arrangements and sales. In the latest development, it has written to lenders “to remind them that they must maintain adequate financial resources at all times”. 

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Some lenders have already set money aside to prepare for the costs of the investigation, including Lloyds Bank, which has ring-fenced £450 million for potential customer redress. 

Close Brothers, another UK lender, announced in February that it was suspending its dividend given uncertainty around the issue.

However, the FCA has observed that firms are taking “different approaches” when it comes to preparing for the operational costs of the investigation and potential compensation. 

Lloyds has the greatest exposure to motor finance thanks to its Black Horse brand, but other high street lenders who could be impacted include Santander and Barclays

The FCA has said that it will set out the next steps of its investigation in September.

What is the FCA motor finance market review?

The FCA banned discretionary commissions for personal contract or hire purchase car finance agreements on 28 January 2021, as it was concerned that they created an incentive for brokers to increase how much people were charged for their car loan.

But the City watchdog is concerned at the level of complaints that firms are rejecting about the issue which are later being upheld by the Financial Ombudsman Service (FOS) or county courts.

It said firms are rejecting most complaints because they consider that they have not acted unfairly, nor caused their customers loss based on the applicable legal and regulatory requirements.

But the FOS has upheld issues that have been rejected by firms in recent cases and the FCA predicts this could prompt a significant increase in other complaints.

Claims have also been brought in the county courts, some of which have been upheld. 

The regulator said this suggests a significant dispute between some firms and consumers on whether firms have breached legal and regulatory requirements.

The FCA is using its powers to pause all complaints about motor finance agreements as it reviews the sector and these sales more widely.

“If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way and, if necessary, resolve any contested legal issues of general importance,” the FCA says.

This pause will apply to complaints received by firms on or after 17 November 2023 and on or before 25 September 2024.

Commission payments were one of the key factors in the PPI scandal as bank customers often didn’t realise they were paying extra.

MoneySavingExpert founder Martin Lewis said the FCA wouldn’t be conducting this review unless it was likely to find wrongdoing. 

He suggested on social media that payouts could be on the scale of PPI redress, which was close to £40 billion.

“The payout would be either the interest on loans, the commission, or the whole loan,” he says.

“We’re possibly talking thousands back for many.”

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.

With contributions from