Could motor finance become the next PPI scandal?

The UK’s motor finance industry could be heading for a financial storm reminiscent of the Payment Protection Insurance (PPI) scandal.

A recent Court of Appeal ruling found car dealerships and lenders liable for failing to disclose commissions to customers, a precedent that could unleash billions in compensation claims.

For decades, PPI haunted UK banks, ultimately costing them around £50 billion in fines and compensation. Now, analysts fear motor finance could follow a similar trajectory. The Financial Conduct Authority (FCA) began investigating potential misselling of motor finance commissions in January, with banks like Lloyds, Close Brothers, and Barclays setting aside provisions in anticipation of compensation claims. This judgment has since raised the stakes, with the potential industry-wide cost now estimated at £6 billion to £16 billion, according to Shore Capital.

Banks and car dealerships are now required to disclose commissions to customers and obtain explicit consent, which has led to operational disruptions, manual processing of finance offers, and temporary suspension of lending by some banks. The Finance and Leasing Association (FLA) warns that claims management companies could seize on this legal uncertainty, mirroring the surge in PPI claims.

Lenders are already bracing for potential losses. RBC Capital Markets has increased its estimated compensation for Lloyds from £2.5 billion to £3.2 billion, while Santander UK’s costs are expected to climb from £1.1 billion to £1.4 billion. Shares in Lloyds have dropped by over 10%, erasing about £3 billion from its value, while Close Brothers has seen its stock plunge nearly 70% this year.

This latest challenge could extend beyond motor finance, applying to other financial products with undisclosed commissions. Claims for compensation could continue to mount if the Supreme Court upholds the ruling, placing further pressure on UK banks and sparking a new wave of claims and regulatory scrutiny.

Paul Jones

Harvard alumni and former New York Times journalist. Editor of Business Matters for over 15 years, the UKs largest business magazine. I am also head of Capital Business Media’s automotive division working for clients such as Red Bull Racing, Honda, Aston Martin and Infiniti.