Car Finance Scandal: Is the FCA’s £11 Billion Redress Scheme Fair to Lenders?

The Financial Conduct Authority (FCA) has outlined a redress scheme for mis-sold Personal Contract Purchase (PCP) car finance contracts, potentially costing the UK lending industry an estimated £11 billion. This initiative follows revelations that millions of PCPs were mis-sold, echoing the earlier Payment Protection Insurance (PPI) scandal, and is prompting significant financial provisions from major lenders while also raising concerns among some industry participants and within the government about the UK’s business environment.

Background to the Mis-selling Scandal

PCP contracts, which became widely popular after the global financial crisis, allowed motorists to make lower monthly payments by covering only the car’s depreciation. However, it emerged that many of these contracts, totaling approximately 11.4 million, were mis-sold. A prevalent issue involved salesmen receiving higher commissions for persuading customers to accept higher interest rates than they might otherwise have paid.

This situation bears similarities to the Payment Protection Insurance (PPI) scandal, where an estimated 16 million policies were sold between 2005 and 2011, many of which were mis-sold. The PPI scandal ultimately cost banks an estimated £50 billion in compensation. The UK’s compensation culture, significantly influenced by the introduction of “no-win, no-fee” legal services in 1995, has seen compensation claims quadruple from 1992 levels by the year 2000.

Regulatory Action and Industry Response

The legal landscape for PCP claims saw a significant development last October when the U.K. Court of Appeal sided with motorists. While initial estimates for total compensation payouts reached £44 billion, the Supreme Court ruled in favor of the industry in two out of three test cases in August, following an unusual attempt by the U.K. Treasury to intervene in January due to concerns about potential damage to the banking sector.

Last week, the FCA confirmed that redress is due on around 14 million contracts taken out between April 6, 2007, and November 1, 2024, estimating an industry-wide cost of £11 billion. In response, major lenders have begun increasing their provisions. Lloyds Banking Group, the UK’s largest domestic lender, recently raised its provisions to £1.95 billion from £1.15 billion, while Close Brothers nearly doubled its provisions to £300 million.

Industry Concerns and Political Tensions

Despite the FCA’s guidance, the industry has expressed reservations about the regulator’s methodology for calculating redress. Lloyds Banking Group pledged to make “representations” to the FCA, arguing that the approach could lead to customers being refunded more than their actual losses. South Africa’s FirstRand and the finance arms of car manufacturers, including BMW, have also voiced concerns, with BMW reportedly seeking talks with Finance Minister Rachel Reeves.

This dispute highlights a potential widening rift between the government and its regulators. Charlie Nunn, CEO of Lloyds, previously stated that court rulings like those seen in October were creating an “investability” problem for the UK. The Treasury’s attempt to intervene in the Supreme Court case suggests that Minister Reeves may share these concerns, pointing towards a possible confrontation with the FCA over regulatory policy and its impact on the economy.