Banks that lent money via motor finance firms could be forced to pay out compensation totalling £10bn if an investigation uncovers evidence of ‘widespread misconduct’.
Car Dealer reported last week that the Financial Conduct Authority (FCA) is to investigate cases of finance houses not paying out compensation to customers over now-banned commission arrangements.
The watchdog is using its powers under s166 of the Financial Services and Markets Act 2000 to identify cases of potential wrongdoing by motor finance firms.
In 2021, the FCA banned commission models that gave motor finance brokers and dealers incentives to raise customers’ finance costs.
It made the move after discovering ‘serious concerns’ about the way lenders chose to reward car retailers and other credit brokers.
However, the vast majority of customers affected by the practice are now having their compensation claims rejected by finance companies, sparking the FCA to investigate.
The Times reports that if the investigation uncovers evidence of ‘widespread misconduct’ then banks could be left footing the bill for £10bn of compensation packages.
The report quotes analysis from stockbroker Numis, which says that Lloyds Banking Group – owner of Black Horse – could be among the hardest hit after lending a whopping £30bn between 2014 and 2020.
The likes of Santander and Close Brothers are also likely to be hit by bills, should the FCA deem higher compensation packages necessary.
Meanwhile, the Royal Bank of Canada estimated total compensation figure at between £2bn and £8bn.
The news comes just a week after the Financial Ombudsman Service ruling on two customers who borrowed money via Lloyds and Barclays.
The ruling ordered that the banks refund the pair more than £1,000 each after both shelled out for excess interest payments, compared to what they would have paid had they been charged a lower rate.
In response to the decision, a spokesman for Black Horse said: ‘We are currently reviewing the FOS decision and will work collaboratively with the FCA on their upcoming review.’
The FCA investigation is ongoing and expected to take 27 weeks.