The City regulator plans to intervene in the car loan mis-selling scandal, in a move that could give lenders up to a year to respond to the rising number of customer complaints after a shock court ruling.
The Financial Conduct Authority has been under pressure to take action after a court of appeal ruling in October said it was unlawful for two lenders to have paid a “secret” commission to car dealers without borrowers’ knowledge.
Lenders complained that the ruling went beyond FCA regulation – as well the watchdog’s ongoing investigation into a much more narrow commission issue – and had created a large amount of uncertainty about potential payouts to customers who could seek compensation as a result.
Some lenders have been flooded with complaints, including from claims management companies and claims law firms, as consumers look to see whether they could be in line for a slice of a compensation bill that the rating agency Moody’s suggests could balloon to £30bn.
The FCA is proposing to ease the pressure by scrapping an eight-week deadline for lenders to respond to customer complaints. It suggests an extension to 31 May 2025 – when it plans to set out the next steps in its narrower investigation – or 4 December 2025.
Nikhil Rathi, the FCA’s chief executive, said: “The court of appeal’s ruling means many customers who bought a car using finance through a dealer could be owed compensation. We want to make sure that consumers who are owed money get it in an orderly way, and that the motor finance market continues to provide competitive deals for the millions of people that rely on it.”
The regulator will consult on both options and is expected to issue a final decision on 19 December.
Lenders have been scrambling to respond and adapt to the court ruling, which its defendants, Close Brothers and First Rand, are to appeal against at the supreme court. Those filings are due this Friday.
Close Brothers and First Rand temporarily halted new business in the UK, while Lloyds scrapped commission payments across its £15bn Black Horse car division.
Adrian Dally, the director of motor finance at the Financing and Leasing Association, a lobby group, said the FCA’s intervention was “a welcome move, [and provides] practical help for the industry in the interim as we wait for a supreme court ruling”.
after newsletter promotion
The FCA announcement came as Close Brothers published its first-quarter results, which showed central costs had jumped nearly 50% compared with the same period last year to £14.2m, as it spent more on legal and professional advice in response to the court ruling.
Close Brothers said it had restarted some of its motor lending and was updating its documents to ensure customers were fully aware of commissions. Bosses said they continued to assess the impact of the ruling and planned to file their supreme court appeal “imminently”.
The lender said: “At this stage, we are maintaining our previously communicated guidance for the 2025 financial year. However, we anticipate there may be some financial impact from measures taken in response to the court judgment, including potential further increases in professional and legal fees and associated operational costs.”