Car Finance Scandal Could Eclipse PPI, Warns City Regulator
Car Finance Scandal Could Eclipse PPI, Warns City Regulator.
A lawyer from the FCA acknowledges that the extent of compensation may be greater than initially anticipated, potentially reaching levels comparable to PPI, which resulted in a £50 billion expense for banks.
Britain's car finance scandal has the potential to rival the payment protection insurance (PPI) mis-selling crisis, which resulted in a £50 billion loss for UK banks, as acknowledged by the chief legal officer of the City regulator.
Stephen Braviner Roman, the general counsel and executive director responsible for legal affairs at the Financial Conduct Authority (FCA), stated that the recent court of appeal ruling in October regarding car finance commission structures significantly broadened the possibilities for consumer compensation.
This pivotal ruling established that the practice of paying a "secret" commission to car dealers who facilitated loans, without revealing the amount and terms of that commission to borrowers, was illegal.
The decision extended beyond the FCA's investigation into a particular type of commission payment, referred to as discretionary commission arrangements (DCAs), which the regulator prohibited 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.”
The implications indicate that the expenses incurred by lenders, such as Lloyds, Santander UK, and Close Brothers, may exceed Moody’s projected figure of £30 billion.
Earlier this year, the chief executive of the regulator, Nikhil Rathi, downplayed the comparison, stating that he did “not anticipate this issue playing out as PPI did”. He had been making efforts to alleviate worries following remarks from Martin Lewis, the founder of MoneySavingExpert.com, who indicated that this situation could result in the largest compensation payout since the PPI scandal.
However, the ruling from the Court of Appeal has significantly expanded the scope of what was previously a limited investigation. The lenders implicated in the motor finance case, namely Close Brothers and FirstRand, the owner of MotoNovo, are currently seeking to challenge the ruling at the Supreme Court.
PPI represented the most expensive and protracted consumer scandal in Britain’s history. Approximately 64 million policies were sold in the UK, primarily between 1990 and 2010, with some dating back to the 1970s, often bundled with loans, mortgages, credit cards, and other financial products.
Regulatory authorities began imposing penalties in 2006 upon discovering that the costly insurance was frequently aggressively marketed and mis-sold by banks, which claimed that the policies would provide coverage in the event of illness or job loss. However, while these policies generated significant profits for the banks, numerous exclusions meant that many customers were unable to file claims.
The implicated lenders continued to pay fines and compensation to affected customers until 2019, resulting in a total industry cost of approximately £48.5 billion.
In the meantime, the chief executive of the FCA cautioned that the chancellor’s intentions to relax regulations and promote increased risk-taking in the financial sector would inevitably attract unscrupulous individuals.
“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 discussing the contents of the chancellor's remit letter, which indicated that initiatives aimed at consumer protection should not hinder "sensible risk-taking" within the financial sector. Rachel Reeves also called on the FCA to enhance its support for the growth and competitiveness of firms in the City.
The remit letter was dispatched shortly after Reeves spoke to bankers at the annual Mansion House dinner, where she asserted that the regulations established to safeguard the economy following the 2007-08 global financial crisis had "overreached."
Her statements have sparked controversy, particularly as Labour's lenient regulations were implicated in the downfall of the Royal Bank of Scotland in 2008. The failure of RBS intensified the global financial crisis, compelling the government to allocate tens of billions of pounds to rescue several banks, which subsequently resulted in years of recession and austerity throughout the UK.
The growing car finance scandal, with potential compensation claims rivaling the PPI crisis, highlights serious concerns about the financial industry’s integrity. As the scope of wrongdoing expands, many consumers may face significant financial losses, exacerbating the already strained relationship between banks and the public.
While some companies push back, challenging rulings and dragging out the process, the damage to consumer trust is undeniable. If the scandal results in the massive payouts predicted, it could cause even greater financial instability, leaving taxpayers and consumers to foot the bill once again, as banks continue to evade true accountability.
