The UK car finance industry could be heading for a financial storm reminiscent of the Payment Protection Insurance (PPI) scandal.
A recent Court of Appeal decision found car dealers and lenders liable for failing to disclose commissions to customers, a precedent that could result in billions in compensation claims.
For decades, PPI has plagued UK banks, costing them nearly £50 billion in fines and compensation. Now, analysts fear that auto finance could follow a similar path. The Financial Conduct Authority (FCA) began investigating possible failings by car finance commissions in January, with banks such as Lloyds, Close Brothers, and Barclays setting aside conditions pending compensation claims. The decision has raised the bar, with potential costs across the industry now estimated at £6 billion to £16 billion, according to Shore Capital.
Banks and car dealerships are now required to disclose commissions to customers and obtain express consent, which has led to operational disruptions, manual processing of financial contributions, and a temporary suspension of lending to other banks. The Finance and Leasing Association (FLA) warns that claims management companies may be caught in this legal uncertainty, which could mean an increase in PPI claims.
Lenders are already looking at potential losses. RBC Capital Markets raised Lloyds’ estimated compensation from £2.5 billion to £3.2 billion, while Santander UK’s costs are expected to rise from £1.1 billion to £1.4 billion. Shares in Lloyds fell more than 10%, wiping almost £3 billion off their value, while Close Brothers has seen its stock fall by almost 70% this year.
This latest challenge may extend beyond car finance, to other financial products with undisclosed commissions. Compensation claims could continue to grow if the High Court upholds the ruling, putting more pressure on UK banks and triggering a new wave of claims and regulatory scrutiny.
