Banks brace for £9.1bn motor finance bill as FCA confirms redress scheme plans

City banks are set to face a more than £9bn motor finance bill after the UK’s financial watchdog laid out plans for its long-awaited motor finance redress scheme in a major U-turn after months of backlash.

The Financial Conduct Authority (FCA) revealed the details of its industry-wide redress scheme for the car mis-selling saga on Monday and lenders were handed crucial reprieve with the overall costs set to come in at £9.1bn, lower than previously expected.

Costs have been slimmed after the number of qualifying agreements for the scheme dropped to 12.1m from 14.2m.

It follows consultation on initial proposals for the regulator’s scheme that estimated motor finance lenders would be slapped with a £11bn bill. The figure was made up of £8.2bn in compensation payments – which averaged at £700 – and an additional £2.8bn in administrative costs for firms implementing the scheme.

It triggered fierce contention, with banking giants accusing the FCA of mis-interpreting the Supreme Court’s summer ruling on the saga.

Despite less people being eligible for the new scheme, the regulator anticipates an average payout of £830.

“We’ve listened to feedback to make sure the scheme is fair for consumers and proportionate for firms. It will put £7.5bn back into people’s pockets,” said Nikhil Rathi, chief executive of the FCA.

Motor finance scheme changes after industry row

In August, the highest court in the land partially overturned a ruling from the Court of Appeal, that the use of discretionary commission arrangements (DCAs) –  ‘secret’ commission paid by lenders to car dealerships without consumer knowledge – were illegal. 

But justices opened the door for the City watchdog to introduce a redress scheme on the grounds of “unfairness,” after ruling in favour of consumers on one out of the three cases brought to the Court, finding that the 55 per cent commission charged was outsized.

The proposals outlined in October sparked controversy with lenders after the FCA set its benchmark for eligible high commission at 35 per cent. 

Opposition also mounted to the timeframe for the redress, with around 14.2m agreements expected to be eligible going back to 2007.

It led to almost all banks with exposure hiking their provisions drastically. Lloyds Banking Group  – which owns the UK’s largest motor finance lender Black Horse –  raised its reserves to £2bn, from £1.2bn. 

Charlie Nunn, the bank’s chief executive, warned: “When you look at the implication of what’s been proposed by the FCA, it’s going to potentially take 20 years of profitability off the car finance industry.” 

The government has maintained a close eye on the unfolding events, with Rachel Reeves previously attempting to intervene in the legal battle over fears it could harm investment into the UK’s financial sector. The Chancellor was ultimately refused by the top Court.

The win for lenders is expected to spark some controversy for consumers and the claims management companies, which have seized on the scandal with aggressive advertising stunts. Claims firms have been struck down by the FCA and solicitors watchdog, with the regulators cautioning consumers against ‘no win no fee’ firms that were hitting consumers with ‘exit fees.’

The All-Party Parliamentary Group (APPG) on Fair Banking warned following the FCA’s initial proposals that the regulator had left a £4.4bn gap favouring the lenders.