UK auto lenders could be hit by up to £16bn in compensation payments after the City watchdog confirmed its probe in historic commission arrangements would look at cases going back to 2007.
The probe concerns so-called discretionary commissions, which allowed brokers and dealers to raise customers’ interest rates.
The Financial Conduct Authority (FCA) confirmed on Wednesday that its review would include deals made between April 2007 – when the Financial Ombudsman Service first started overseeing the practice – and January 2021 – when discretionary commissions were banned.
Analysts have subsequently increased their estimates for much lenders could be forced to pay out.
Investment bank RBC said the motor finance industry could be on the hook for up to some £16bn – up from its estimate of £8bn last week.
Lloyds, the owner of the UK’s largest auto lender Black Horse, is still expected to bear the brunt of the potential fallout, with RBC raising its estimate to up to £2bn from £1.1bn. Jefferies put forward a figure of £1.8bn.
Lloyds’ shares have plunged 4.1 per cent since the FCA’s statements yesterday afternoon.
RBC analysts now expect Barclays, which provided motor lending between 2010 and 2019, could face up to £250m, while the figure for merchant banking group Close Brothers has nearly doubled to £200m – giving it the largest relative impact.
Barclays’ shares have fallen 1.4 per cent since Wednesday afternoon, while Close Brothers has slumped 6.7 per cent.
RBC added that Santander UK could face a £850m bill. The Spanish bank’s London-listed stock fell more than two per cent on Thursday.
Jefferies said the industry could be on the hook for up to some £13bn, raising its estimate from around £4bn. Analysts estimated that consumers overpaid almost £7bn across the 14-year period.
Some experts have compared the FCA’s new probe to the payment protection insurance (PPI) scandal, which led to banks paying tens of billions in compensation and fines after misselling insurance to millions of customers.
However, others have pointed out that banks did not benefit from discretionary commissions in the way they did from PPI.
City A.M. approached Black Horse and Close Brothers for comment.