The UK’s largest banks are preparing for another round of clashes with regulators over compensation for customers who were mis sold car loans. This comes even after the banks recently set aside an extra £1.5 billion to cover the costs of the ongoing scandal.
Barclays revealed on Wednesday that it has increased its provision for compensation by about four times. A day later, Lloyds Banking Group reported a 36% drop in its third-quarter pre-tax profit, largely due to an additional £800 million charge linked to the issue.
The trouble doesn’t stop there. The Financial Conduct Authority (FCA) recently announced a new redress scheme, but some lenders say this plan is more demanding than they expected. FirstRand Ltd., a South African bank with a significant market share in the UK car finance sector, said the FCA’s proposal exceeds what it considered fair based on recent court rulings. Meanwhile, Santander’s UK unit has yet to adjust its earlier £295 million provision.
Smaller lenders haven’t been spared either. Close Brothers, Bank of Ireland, and Secure Trust Bank have all increased their provisions recently. Even finance arms of carmakers feel the pressure. BMW’s UK finance division disclosed nearly £207 million set aside, and Renault’s RCI Financial Services, which also covers Nissan financing, has put aside £73.6 million.
The FCA’s plan aims to settle claims arising from widespread failures by lenders to disclose hidden charges, which could total around £8.2 billion. That figure doesn’t include an estimated £2.8 billion for running the compensation scheme itself.
Many lenders have criticized the FCA’s approach. Secure Trust Bank said the regulator’s method is “extreme” and ignores a July Supreme Court ruling that many thought would ease the banks’ burden. Industry voices argue the FCA’s criteria for compensation are so broad that even customers who suffered no real loss might still get paid.
The FCA defends its plan, saying it offers the fastest and most cost-effective way to resolve the long-standing issue. They insist court judgments confirm that lenders have liabilities and that delays or alternative methods would cost more and take longer.
Lloyds hasn’t ruled out taking legal action against the FCA. Its CFO, William Chalmers, said the bank is currently focused on discussions during the consultation period, which ends next month. Barclays plans to engage with the regulator as well. FirstRand has indicated the future of its UK operations may depend on the final outcome of the redress program.
The controversy centers on commission payments from lenders to car dealers for selling loans. The FCA banned discretionary commissions in 2021. A recent Supreme Court decision was seen as a win for lenders, ruling they should only pay compensation in cases of the most serious abuses.
Even with the higher provisions, banks’ public funds set aside still fall well short of the FCA’s estimated payout amounts. Some of the difference is due to many firms involved in the scandal not having to disclose provisions. Others hope the FCA will tone down its demands before finalizing the compensation rules later this year, but experts caution that the regulator may not loosen the standards.
As this saga continues, lenders face a tough choice: challenge the FCA’s plans and risk prolonged uncertainty and reputational damage, or accept a payout and move forward.
The car finance sector is already under pressure from other problems like weaker sales in China, higher US tariffs, and sluggish demand for electric vehicles. This new wave of compensation charges is adding to the strain, making it a challenging moment for the industry.