UK’s FCA Says Lenders Face Minimum £9 Billion Bill on Car Loans

The UK’s Financial Conduct Authority will consult on a redress scheme to guide firms on how they should compensate motor finance customers that were missold car loans, which it estimates could leave such lenders on the hook for at least £9 billion ($11.9 billion).

The cost could plausibly be as high as £18 billion but a lower figure was more likely, according to a press release by the FCA on Sunday. The announcement comes after the UK’s top court handed a big boost to banks on Friday, overruling lower court judgments and reducing the worst-case amount they would need to pay out in compensation.

The Supreme Court’s judgment will see firms avoid the enormous payouts many had feared, with some initial estimates suggesting the cost could have topped £30 billion. But the industry still faces a multi-billion pound compensation bill.

Update: Lenders Get Reprieve in UK Motor Finance Case From Top Court

“We think it is unlikely that the cost of any scheme, including administrative costs would be materially lower than £9 billion and it could be materially higher,” the FCA said in the statement, cautioning that any estimates are highly indicative and susceptible to change.

While there are “plausible scenarios which underpin estimates of a total cost as high as £18 billion, we do not consider those scenarios to be the most likely and analyst estimates in the midpoint of this range are more plausible,” the FCA said, adding it would publish the consultation by early October with people expected to start receiving any compensation next year.

Various lenders, including Lloyds Banking Group Plc and Banco Santander SA, have already taken a hit of about £2 billion for potential losses relating to such business. Lloyds said in a statement Monday that “if there is any change to the provision it is unlikely to be material in the context of the group.”

The total amount the wider motor finance industry has so far provided for isn’t known.

American Depositary Receipts of lenders like Lloyds and Close Brothers Group Plc — which said in a Monday statement it looked forward to engaging with the FCA on the consultation — soared after the judgment was handed down on Friday.

The full extent of the losses that firms will face as a result of hidden commissions in car finance arrangements won’t be clear until the redress scheme is finalized, but fears of a PPI-style compensation scheme have been allayed by the Supreme Court’s judgment. The FCA said that most individuals were unlikely to receive compensation of more than £950.

Three rulings by the Court of Appeal were the subject of the decision on Friday, with two of them overturned on appeal in favor of the banks. The Supreme Court did say that in one of the cases a customer had been treated unfairly by the lender, FirstRand Ltd., and that will help shape the regulator’s redress scheme.

“The Supreme Court agreed with several factors we had identified which could point towards an unfair relationship and fall foul of the Consumer Credit Act,” the FCA said. “This clarity helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts.”

Photograph: Car dealership in the UK. Photo credit: Chris Ratcliffe/Bloomberg