10:29 am, November 20, 2024
Ratings agency Moody’s has warned that the UK’s car finance scandal may cost lenders as much as £30bn based on its worst-case scenario modelling.
The agency has cautioned that lenders should set aside sums to this value in case the cost of compensation in the motor finance scandal is greater than first expected.
A recent court ruling found that banks must fully inform customers about the existence and size of commissions to brokers, known as discretionary commission arrangements (DCAs), when selling car loans.
The Court of Appeal judgement opens the door to customers and no-win, no-fee lawyers to seek financial redress for customers if they weren’t made aware of DCAs when taking out finance.
A review into the scandal by the Financial Conduct Authority led to initial projected costs of less than £10bn, but most ratings agency have since adjusted this upwards. Moody’s says it expects the ultimate price to the industry to be between £8bn and £21bn, but has warned of costs of up to £30bn as a worst-case scenario.
The Finance Commission Story So Far
- FCA needs to answer serious questions over car finance Court of Appeal decision
- Car finance slowly starting up again as lenders change systems and some freeze commission payments
- Chaos: Car finance grinds to a halt in wake of Court of Appeal decision
- Close Brothers stops underwriting new dealer finance after court ruling
- FCA chief executive calls for clarity over motor finance judgement
- Car finance pauses as banks figure out legal implications – who has stopped lending?
- Honda ‘pulls car finance and delays customer handovers’
- FLA: Court of Appeal ruling was ‘very unexpected’ but ‘welcome’
- Could car finance commissions case become the next PPI ‘scandal’?
- Short-term headache or genuine game-changer? What mounting finance crisis means for dealers
- Banks face downgraded credit ratings as a result of car finance scandal
The car finance scandal looks set to be the biggest case of mis-selling in the loan industry since the Payment Protection Insurance disgrace in the early 2000s, which cost lenders in excess of £50bn.
The Court of Appeal judgement published in October has rocked the industry, with shares in Lloyds falling by 9% and those in Close Brothers, of which more than 20% of loans on its books are automotive finance, by 45%.
Any progression on the case has been paused while the FCA consults on extending the current pause in the time motor finance firms have to respond to customer complaints in light of the recent judgement.
Last week, the FCA said the Court of Appeal’s judgement on October 25 has caused the decision to put forward an extension, while it considers bringing in a formal redress scheme.
The proposal is expected to be published within two weeks, and if agreed will mean the pause will be in place until mid-December 2024. The FCA has been investigating the motor finance industry’s use of now banned discretionary commission arrangements (DCAs) since January.
The FCA said that October 25’s ruling will likely see motor finance firms receive ‘a high volume of complaints’, adding: ‘Any complaint extension would allow them time to consider how these might be efficiently and effectively handled.
Money Saving Expert pundit Martin Lewis said last week that the ruling represented ‘a substantial threat to the car finance industry’.
