Car finance scandal could cost up to £50bn Payment protection insurance debacle

The scandal in the car finance industry could end up costing as much as the £50bn payment protection insurance (PPI) debacle more than a decade ago, the City watchdog has admitted.

Stephen Braviner Roman, chief legal officer of the Financial Conduct Authority (FCA), told MPs it would be “premature” to say the impact on lenders would not reach the same level as the PPI.

This implies an even greater potential cost than the highest estimate yet from credit rating agency Moody’s, which has suggested the entire industry could be hit by up to £30bn.

Hundreds of thousands of customers have complained about the way car dealers sell loans to finance vehicle purchases.

The complaints center on the practice of dealers receiving a commission from lenders for selling those loans.

Earlier this year, the FCA launched an investigation into overcharging customers as a result. It focused on the now-banned use of “discretionary commission agreements” (DCAs), where traders were rewarded with higher commissions the higher the lending rates.

But an Appeals Court ruling in a separate case in October expanded the scope of the scandal, leaving the industry stunned.

The court said it was illegal for dealers to receive a commission from lenders without receiving informed consent from the customer.

Crucially, the ruling covered not only DCAs but also fixed commission payments, dramatically increasing the potential scale of the scandal.

Lloyds Banking Group is among lenders facing a potentially large compensation bill and has set aside £450m to cover the cost. Meanwhile, Santander UK has set aside £295m.

Two smaller lenders, Close Brothers and Investec, have also revealed that they continue to face uncertainty over the impact of the scandal.

Earlier this year, before the ruling, FCA chief Nikhil Rathi attempted to downplay comparisons with PPI.

But yesterday, Braviner Roman told MPs on the Treasury select committee: “The magnitude of the problem that we expected and were investigating has certainly been amplified by the Court of Appeal decision.”

That decision is subject to a possible appeal to the Supreme Court, so it may not be the “final word,” he said.

He added: ‘We’ve said before that if we look at DCAs alone, we don’t think it’s the scale of the PPI.

“But that was when we were looking at just DCAs, so it would be premature to say it’s definitely not the scale of today’s PPI.”