The UK’s financial sector is facing potential upheaval as the Financial Conduct Authority (FCA) delves into an investigation concerning unfair car finance deals. The heart of the inquiry is whether banks, including the prominent Lloyds Banking Group, might be responsible for reimbursing customers to the tune of £10 billion. This investigation comes amid concerns that borrowers were subject to inflated interest rates before January 2021, leading to unjustly high commissions for car dealerships.
Discretionary Commission Arrangements
The FCA’s scrutiny is zeroing in on a sales model known as “discretionary commission,” which grants dealers the liberty to set and modify interest rates, thereby directly influencing their commission earnings. This practice was particularly widespread between 2013 and 2016, affecting an estimated 40% of the car finance lending market. According to insights from analysts, Lloyds could be facing a staggering £1.5 billion bill, while the Royal Bank of Canada’s estimates cast a wider net, projecting industry-wide liabilities ranging from £2 billion to £8 billion.
‘This brand new miss-selling scandal is all about hidden commission”
Martin Lewis, MoneySavingExpert
The implications of these findings are significant, considering the Finance & Leasing Association’s data, which shows a staggering 93% of new cars are purchased through finance options. This positions vehicle finance as a predominant form of household debt, with about £40 billion funnelled into these loans annually. The anticipated savings for consumers, should the FCA’s ban on discretionary commissions be enforced, is projected at £165 million a year in overpayment prevention.
The issue has already seen action from the Financial Ombudsman Service, which has directed Barclays and Lloyds to reimburse overcharged interest payments to borrowers, averaging over £1,000 each. These decisions were based on complaints that argued for a lack of transparency, with borrowers being in the dark about the higher interest rates and, consequently, the excess payments benefiting the dealers.
Companies likely to be affected:
- Barclays Partner Finance (Barclays Group)
- Black Horse (part of Lloyds Banking Group)
- Santander
- MotoNovo
- BMW Group
- Mercedes-Benz
With the investigation expected to extend for 37 weeks, the FCA’s inquiry was sparked by over 16,000 complaints to the Financial Ombudsman Service since September 2022. There’s a growing sentiment among claims companies that this could burgeon into a mis-selling debacle on a par with the notorious payment protection insurance scandal, which cost the banking industry a hefty £38.4 billion.
Lloyds Banking Group, which has previously doled out over £20 billion in reparation for mis-sold payment protection insurance policies, might find some solace in the FOS’s current stance that compensation should be confined to the excess interest paid. Lloyds’ dedicated car finance branch, Black Horse, is currently reviewing the FOS’s decision and has expressed a willingness to cooperate with the FCA in its forthcoming review. The Finance & Leasing Association has also committed to assisting in resolving the issue, emphasizing its cooperation with the FCA’s regulatory measures.
The potential compensation bill throws a spotlight on the ongoing tension between consumer protection and financial institutions’ sales practices. It underscores the need for a delicate balance between profit generation and ethical responsibility in financial dealings. As the investigation unfolds, the industry braces itself for a resolution that could set new precedents for transparency and fairness in the UK’s banking sector.
Author Profile
- Lucy Walker covers finance, health and beauty since 2014. She has been writing for various online publications.
Latest entries
- April 25, 2025Global EconomicsWhistleblowers Unmask Schwab’s Toxic WEF Secrets
- April 9, 2025Global EconomicsTariff Tensions Drive Market Volatility
- March 18, 2025Global EconomicsRed in Name Only: Labour’s War on the UK Working Class
- March 7, 2025SatoshiCraig Wright Banned from UK Courts with Civil Restraint Order