Britain’s car finance scandal could end up being as big as the payment protection insurance (PPI) mis-selling saga, which cost UK banks £50bn, the City regulator’s top lawyer has admitted.
Stephen Braviner Roman, the Financial Conduct Authority’s general counsel and executive director in charge of legal affairs, said October’s shock court of appeal ruling into car finance commission arrangements vastly expanded the scope of potential consumer compensation.
The landmark ruling determined that paying a “secret” commission to the car dealers who had arranged the loans without disclosing the sum and terms of that commission to borrowers was unlawful.
The judgment went beyond an investigation by the FCA into a specific type of commission payment, known as discretionary commission arrangements (DCAs), which was banned by the regulator in 2021.
“We’ve previously said that looking at DCAs alone, we do not think it’s the scale of PPI,” Braviner Roman told MPs during a Treasury committee hearing on Tuesday. “But that was when we were looking at DCAs alone. So I think it would be premature to say it’s definitely not the scale of PPI now.”
It suggests that the resulting costs to lenders, including Lloyds, Santander UK, and Close Brothers, could top Moody’s estimates of £30bn.
Earlier this year, the regulator’s chief executive, Nikhil Rathi, played down the comparison, saying he did “not anticipate this issue playing out as PPI did”. He had been trying to quell concerns after the MoneySavingExpert.com founder, Martin Lewis, said it could be the largest compensation bill since PPI.
But the court of appeal ruling has blown the roof off the otherwise contained investigation. Lenders involved in the motor finance court of appeal case – Close Brothers and the MotoNovo owner, FirstRand – are in the process of appealing against the ruling at the supreme court.
PPI was Britain’s costliest and longest-running consumer scandal. As many as 64m policies were sold in the UK – mostly between 1990 and 2010, and some as far back as the 1970s – alongside loans, mortgages, credit cards and other deals.
Regulators started imposing fines in 2006, after finding that the expensive cover was often aggressively pushed and mis-sold by banks, who said the policies would pay out if borrowers fell sick or lost their jobs. But while the policies were profitable for banks, policy exclusions meant that in many cases customers could never make a claim.
The offending lenders continued paying fines and compensation to customers over the scandal until 2019, taking the final industry bill to about £48.5bn.
Meanwhile, the FCA’s chief executive warned that the chancellor’s plans to loosen regulation and encourage more risk-taking across the City would inevitably attract bad actors.
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“We can’t stop everything. If we’re going to allow more risk into the system … it sometimes does attract people who don’t have the best of intentions,” Rathi said.
Rathi was addressing the content of the chancellor’s remit letter, which said efforts to protect consumers should not stand in the way of “sensible risk-taking” across the financial sector. Rachel Reeves also urged the FCA to do more to support the growth and competitiveness of City firms.
The remit letter was sent hours after Reeves addressed bankers at the annual Mansion House dinner, where she said regulations put in place to protect the economy after the 2007-08 global financial crisis had “gone too far”.
Her messaging has proven controversial given that Labour’s lax regulations were blamed for contributing to the collapse of Royal Bank of Scotland in 2008. RBS’s failure exacerbated the global financial crisis, forcing the government to spend tens of billions of pounds to bail out a string of banks, and leading to years of recession and austerity across the UK.
