Volkswagen Sets Aside £725 Million for UK Car Finance Payout

The UK financing arm of Volkswagen AG has made a £725 million ($960 million) provision to cover the costs of a plan to compensate British customers who were overcharged for car loans.

It’s the first time that Volkswagen Financial Services (UK) Ltd. has revealed the hit it expects to take in its accounts filed at Companies House.

The Financial Conduct Authority’s £7.5 billion plan to compensate customers was partially suspended in July following legal challenges from the motor finance units of manufacturers including VW.

That decision added another layer of uncertainty over the implementation of the plan for lenders to compensate consumers for missold car finance dating back as far as 2007. The payout plan included a further £1.6 billion that companies must bear in costs.

The “final outflow could vary materially from the current provision,” VWFS said in the accounts.

The company has “a robust approach” to planning for the FCA’s proposed redress program, including appropriately provisioning, VWFS said in an emailed statement. It continues to seek independent clarification from the tribunal to ensure the program is “lawful, fair and properly targeted.”

The announcement adds to the hit taken by German carmakers. In accounts filed last month, BMW’s UK unit roughly tripled its provision for compensation to £612 million.

It’s not just carmakers and their finance arms that are affected. Lloyds Banking Group Plc has made the largest provision at almost £2 billion, while other lenders such as Close Brothers Group Plc have also set aside money.

The compensation program prompted South African lender FirstRand Ltd. to exit from its UK motor-finance business after estimating it will have to provision £750 million as payouts.

Photograph: The Volkswagen logo; photo credit: Krisztian Bocsi/Bloomberg