Motor finance backlash mounts with calls to pull £4bn from lenders
The financial watchdog is back in the hot seat as criticism of its controversial motor finance redress scheme continues to mount.
A fresh report from the All-Party Parliamentary Group (APPG) on Fair Banking has blasted the City watchdog for a “£4.4bn billion gap” in the proposed scheme.
The group accused the regulator of being “influenced by the profit margins of the lenders”.
It marks a new round of criticism for the Financial Conduct Authority (FCA) which has also faced fierce opposition from the City’s banking giants. Effectively, criticism is coming from both sides with some – including the APPG’s members – claiming the scheme lets lends off the hook while many analysts and banking chiefs think it goes too far.
The consultation on the watchdog’s proposals will end on November 18 with the full outline of the redress scheme expected early 2026.
John Cronin, banking analyst at Seapoint Insights, told CityAM: “Given the extent of pushback, I expect that the consultation will be extended beyond the deadline – and, on balance, I expect a softening in some of the parameters of the proposed redress scheme.”
The watchdog estimates total costs of the scheme will be near £11bn, falling at the smaller end of previous expectations which warned of highs of £18bn.
No calm resolution to motor finance row
Criticism from the APPG surrounded the FCA’s compensatory interest rate for mis-sold loans, which the group said ”has done more than any other facet of the scheme to favour the industry”.
In August, the Supreme Court handed banks a lukewarm win overturning the Court of Appeal’s ruling that it was unlawful for banks to pay a commission to a car dealer without the customer’s informed consent.
However, the top Court upheld the case of one claimant, Johnson, finding his outsized commission fee was “unfair”.
Top analysts expect Johnson to have received near seven per cent interest on his compensation packet.
The FCA has proposed a rate of 2.09 per cent for its scheme.
Across the aisle, the City’s banking giants have taken a swing at the regulator for figures they find to be “disproportionate”.
Santander UK pulled the plug on its third quarter results last week citing motor finance uncertainty as bank chief Mike Regnier called for the government to actively consider stepping in.
He warned if the government does not intervene “the unintended consequences for the car finance market, the supply of credit and the resulting negative impact on the automotive industry and its supply chain could significantly impact jobs, growth and the broader UK economy.”
Watchdog under fire
It follows a chorus of calls from banking bosses with Lloyds’ Charlie Nunn warning the scheme could wipe 20 years of profitability off the sector.
Lloyds raised its provisions to £2bn last month whilst Barclays near-quadruped its funds set aside to £325m.
RBC analyst Benjamin Toms said: “There is still some risk in our view that the final redress scheme and the FCA’s definition of unfair gets challenged in the administrative courts.”
Last month, CityAM revealed the FCA was facing accusations of a “massive overreach” after it had issued letters to claims management companies and law firms requesting detailed documents of their operations in motor finance cases.
Cronin added if there is no clarity ahead of the Autumn Budget – pencilled in for November 26 – it “could influence the Chancellor’s decision as to whether to jack up bank taxes or not.”
A spokesperson for the Financial Conduct Authority said: “We have proposed a scheme to fairly compensate motor finance customers in a timely and efficient way.
“We recognise that there will be a wide range of views on the scheme and not everyone will get everything they would like. But we want to work together on the best possible scheme and draw a line under this issue quickly. That certainty is vital, so a trusted motor finance market can continue to serve millions of families every year.”