The UK’s financial watchdog said on Thursday it plans to decide on whether to launch a compensation scheme for mis-sold car loans within six weeks of an imminent court ruling.
This would likely bring clarity for Bank of Ireland, which has a 2 per cent share of the UK motor finance market, on the ultimate cost of an industry-wide saga. The Dublin-based group set aside a provision of £143 million (€172 million) last year for a potential compensation scheme, though many analysts say the bill could rise.
Analysts say the episode could be the costliest for the UK banking sector since they paid almost £40 billion in redress in the 2010s for mis-selling payment protection insurance.
The Financial Conduct Authority (FCA) is awaiting a UK supreme court ruling, likely to come in July, on whether to uphold a lower court verdict that several car finance schemes were unlawful, which could require a compensation scheme for millions of customers.
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“We’ll confirm within six weeks of the supreme court judgment whether we’re proposing to introduce a redress scheme,” the FCA said in a statement on Thursday morning, adding that it plans to have shorter than normal consultation engagement thereafter, possibly as tight as six weeks.
The regulator noted that it has already been speaking to consumer groups, lenders and industry trade bodies “to get their views on important issues to consider if we do introduce a redress scheme”.
The FCA said it aimed to make any redress scheme easy to understand so that affected consumers can take part in it without using claims management companies that take a chunk of compensation in fees in return for helping with a claim. Claims management companies chased business during the payment protection insurance scandal.
The FCA set up a review early last year into whether motor finance customers were being overcharged because of historical use of discretionary commission arrangements (DCAs) between car dealers and lenders. The examination covers 14 years before such arrangements were banned in 2021 in the market.
DCAs involved lenders setting a minimum rate for car finance but giving brokers, typically forecourt salespeople, the discretion to set higher rates. Commission paid by the lender was linked to rates charged – meaning the higher the rate the car buyer pays, the more the broker gets.
The FCA has argued, however, that the London court of appeal went too far on a number of test cases, when it decided in October 2024 that motor brokers owed a fiduciary duty to customers. The regulator is seeking to balance consumers’ ability to get a fair deal with making sure the motor finance market functions well.
“More than two million used and new vehicles are bought using motor finance each year. We want to make sure the motor finance market functions well, with effective competition, so consumers can get a fair deal,” it said on Thursday.
Banks have argued a too-punitive scheme could harm a market that customers rely on to buy cars, and damage the UK’s reputation as a hub for financial services.
Goodbody Stockbrokers analyst Denis McGoldrick estimates that Bank of Ireland faces having to set aside a total of €270 million to cover potential redress – some 57 per more than it has provided for to date. Elsewhere, RBC Capital markets estimates that the final cost to the bank could be €700 million.
Lloyds Banking Group is the biggest player in the industry. UK-based Close Brothers and South Africa’s FirstRand are also significant participants and are behind the supreme court appeal.
