Britain's car finance industry is facing a significant scandal that could rival the payment protection insurance (PPI) mis-selling saga. The Financial Conduct Authority's top lawyer, Stephen Braviner Roman, has admitted that the scope of potential consumer compensation has vastly expanded due to a shock court of appeal ruling. This ruling determined that paying "secret" commissions to car dealers without disclosing them to borrowers is unlawful, going beyond an ongoing investigation into discretionary commission arrangements (DCA).

Unraveling the Magnitude of Britain's Car Finance Scandal

Expanding Scope of Potential Compensation

The court of appeal ruling in October has opened up a whole new chapter in the car finance scandal. As Stephen Braviner Roman told MPs during a Treasury Committee hearing, previously looking at DCAs alone, they didn't think it would be on the scale of PPI. But now, with the expanded scope, it's too early to rule out a similar-sized compensation bill. This suggests that lenders could face costs topping Moody's estimates of £30bn. Earlier this year, the regulator's chief executive Nikhil Rathi downplayed the comparison, but the court ruling has changed the game. Lenders involved in the motor finance court of appeal case, such as Close Brothers and MotoNovo owner FirstRand, are appealing the ruling at the supreme court.This scandal is not just a one-off event. As many as 64m policies were sold in the UK between 1990 and 2010, and some even as far back as the 1970s, alongside loans, mortgages, credit cards, and other deals. Regulators started imposing fines in 2006 after finding that expensive cover was often aggressively pushed and mis-sold by banks. While the policies were profitable for banks, policy exclusions often meant customers couldn't make claims. The offending lenders continued to pay fines and compensation until 2019, with the final industry bill reaching about £48.5bn.

Impact on Lenders and the Financial Sector

The car finance scandal is having a profound impact on lenders. Lloyds, Santander UK, and Close Brothers are among those potentially facing significant costs. This not only affects these individual lenders but also has implications for the entire financial sector. It raises questions about the integrity of the car finance market and the need for stricter regulations. The FCA's chief executive, Nikhil Rathi, has warned that the chancellor's plans to loosen regulation and encourage more risk-taking will attract bad actors. He emphasized that while allowing more risk into the system can have benefits, it also comes with risks.The remit letter sent to the FCA hours after Reeves addressed bankers at the annual Mansion House dinner highlights the delicate balance between protecting consumers and encouraging growth. Reeves said regulations put in place after the 2007-08 global financial crisis had gone too far, but her messaging has been controversial given Labour's lax regulations were blamed for the collapse of Royal Bank of Scotland in 2008. This shows the complexity of the situation and the need for careful consideration of regulatory changes.