Motor Finance Lenders in "State of Rage" Over Proposed Compensation Scheme

Strategic Insights -

The UK motor finance market has been left reeling after the Financial Conduct Authority (FCA) proposed a compensation scheme to tackle four million claims alleging unfair commissions on car loans. The scheme, which would see customers on average receive £700 in compensation, has sparked a major row between lenders, consumers, and the regulator. Motor finance lenders are in a "state of rage" over the proposal, which they believe is too costly and will force some out of the market.

At the heart of the matter is a Supreme Court ruling in August that found a 55% commission on a car loan was unfair and that the customer should receive compensation and interest. The FCA's proposed scheme aims to tackle four million claims that lenders had already received, but the industry is objecting to the scheme's methodology, arguing that it overestimates the loss to customers and does not meet the objective of ensuring that customers are compensated proportionately.

The lenders, including FirstRand, Lloyds, and Close Brothers, have raised their provisions to set aside cash for the expected flood of claims, with Lloyds increasing its provision to just shy of £2 billion. FirstRand, which owns MotoNovo through its Aldermore UK arm, has taken a provision of £240 million, while Close Brothers has nearly doubled its provision to £300 million. The question is whether this will be enough to force FirstRand out of the market, as its chief executive, Mary Vilakazi, hinted earlier in the year.

The FCA's cerebral chief executive, Nikhil Rathi, has faced criticism from the industry and the House of Lords financial regulation committee, which has accused him of being "asleep at the switch" and placing an "unreasonable and disproportionate burden on lenders." Rathi remains unrepentant, stating that firms and lenders broke the laws and rules that were in place at the time.

Key Takeaways:

  • The motor finance industry is in a state of rage over the proposed compensation scheme, with lenders arguing that it is too costly and will force some out of the market.
  • The scheme would see customers on average receive £700 in compensation, but lenders argue that it overestimates the loss to customers and does not meet the objective of ensuring that customers are compensated proportionately.
  • The lenders have raised their provisions to set aside cash for the expected flood of claims, with Lloyds increasing its provision to just shy of £2 billion.
  • FirstRand, which owns MotoNovo through its Aldermore UK arm, has taken a provision of £240 million, while Close Brothers has nearly doubled its provision to £300 million.
  • The FCA's cerebral chief executive, Nikhil Rathi, has faced criticism from the industry and the House of Lords financial regulation committee, which has accused him of being "asleep at the switch" and placing an "unreasonable and disproportionate burden on lenders."
  • The Chancellor has told industry regulators, including the FCA, to focus on a progrowth agenda, which some lenders argue contradicts the measures that might force them to rethink their exposure to the motor finance market.

Statistics:

  • £700: The average payout to customers under the FCA compensation scheme.
  • £2 billion: Lloyds' increased provision to set aside cash for the expected flood of claims.
  • £240 million: FirstRand's provision for the expected flood of claims.
  • £300 million: Close Brothers' nearly doubled provision for the expected flood of claims.
  • £200 million: BMW's set aside for potential compensation.
  • £50 billion: The cost to the City of the payment protection insurance scandal.
  • £39 billion: The amount of motor finance borrowed by two million people last year.

Sources:

  • "FCA proposes compensation scheme for motor finance customers" (The Times)
  • "FirstRand faces pressure over motor finance business" (The Times)
  • "Lloyds Bank raises provision for motor finance claims" (The Times)
  • "Close Brothers nearly doubles provision for motor finance claims" (The Times)
  • "BMW seeks audience with Chancellor over motor finance scandal" (The Times)
  • "FCA's Nikhil Rathi faces criticism over motor finance compensation scheme" (The Times)