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Britain’s main financial regulator plans to cut up to £1 billion from compensation paid by carmakers over the involvement of their in-house lenders in the motor finance mis-selling scandal.
The Financial Conduct Authority’s planned crackdown comes after heavy lobbying from banks and carmakers, who have warned the regulator that its £11bn rescue program risks hurting investment in UK auto manufacturing unless it responds to their criticism of the scheme’s design.
The long-running dispute centers on the commission lenders pay to car dealerships when offering loans to customers. Regulators and courts have said these were inadequately disclosed to consumers and encouraged charging higher interest rates.
The issue has at times hit the share prices of Britain’s biggest banks, which have been forced to book billions of pounds of provisions to cover compensation costs. Car makers such as Mercedes-Benz and BMW have also set aside more than £500mn.
Two people briefed on FCA’s plans said it is preparing to exempt carmakers’ in-house finance branches from paying compensation to at least some customers who were not explicitly told that the finance to buy their vehicle came from a lender with a special relationship with the car dealership.
Many large car manufacturers, including Volkswagen, Stellantis, BMW and Toyota, have their own in-house banking operations – known as captive lenders – to provide financing to buyers of their vehicles.
According to the FCA, captive lenders provide over 80 per cent of new car finance in the UK and around 40 per cent of used car sales.
The regulator has estimated that captive lenders will have to pay out about 47 per cent of the £8.2 billion owed to consumers under the scheme. Including administration costs, the total cost to lenders of the scheme is set at £11 billion.
Inadequate disclosure of “tied agreements” between finance companies and dealerships is one of three key areas where the FCA Said Lenders will have to repay millions of consumers who took out vehicle finance between 2007 and 2024.
But captive lenders have argued that their loans should not count as tied agreements – at least for new car purchases – because they offer loans at attractive rates that can be as low as 0 percent, which carmakers offer as incentives for people to buy their vehicles.
The FCA said in a statement to the FT: “We are carefully considering the feedback and a decision has not been made on final scheme rules.”
Captive lenders are still set to be caught up by the other two areas in which consumers will be eligible for redress under the FCA’s proposals, which are aimed to be finalized by next month.
Much of the redress will still be due to poorly disclosed discretionary commissions, which have allowed the dealership to earn more if it keeps customers at a higher rate. Some will also have high commissions of more than 35 percent of the total cost of the loan or more than 10 percent of the loan.
The 2024 Appeal Court ruling had threatened to impose a cost burden of up to £44 billion on lenders, but lenders were given a reprieve in August when the Supreme Court overturned much of that ruling and reduced the potential fallout.
Following the ruling, the FCA drew up rules for a planned redress scheme requiring banks to make additional provisions amid claims the regulator was too harsh. In October, the regulator invited feedback on its proposals.
Adrian Daly, director of motor finance at the Financing and Leasing Association trade body, told the FT: “The proposal the FCA has made on tied relationships is irrational and not in line with what the Supreme Court has said.”
The FCA is also making other changes to the way it administers the redress scheme, said two people briefed on discussions with the regulator.
Under its current proposals, lenders would be forced to contact all customers who have entered into a car finance agreement, regardless of whether they are eligible for compensation or not. The watchdog has indicated it will allow lenders to contact only those who are expected to be entitled to funds under the scheme, the people said.
Lenders are also lobbying for an “implementation period” to give them more time to prepare before starting to contact affected parties, an idea the watchdog has signaled it would support.
Additional reporting by Kana Inagaki
