Carmakers are braced to make big payouts to victims of the motor finance scandal, as the City regulator said firms ranging from Ford to Hyundai could end up footing nearly half of an £11bn compensation bill.
The Financial Conduct Authority (FCA) has estimated that “captive lenders” – the financial arms of carmakers that issue loans to drivers – will have to cover 47% of the redress to borrowers. That would take their bill to roughly £5.2bn.
The size of the carmakers’ exposure has surprised experts examining the unfolding scandal. Lenders including Lloyds, Santander UK, Barclays and specialists such as Close Brothers had been expected to bear the brunt of the costs. Banks are now expected to account for 51% of the payouts, while independent lenders would make up the remaining 2%, the FCA said.
“Our assessment indicates that banking and captive lenders are likely to face the largest liabilities,” its consultation papers said.
The FCA has proposed a redress scheme that could cost lenders about £11bn, made up of £8.2bn in compensation and £2.8bn in running costs. Compensation payouts for 14m unfair loans are expected to average £700.
The regulator is attempting to draw a line under the ongoing scandal in which drivers were overcharged for loans as a result of controversial commission paid to car dealers. It follows a supreme court ruling in August that upheld one of three consumer complaints.
The total could rise to £12.4bn if all victims apply and secure payouts as part of the scheme, the FCA said. That is still lower than earlier forecasts of £18bn.
Carmakers are expected to absorb the bill, but the FCA said it was not yet clear how they would react. “We consider these firms to be more resilient in relative terms, with potential for financial support from their group, greater access to funding and ability to absorb cost shocks,” it said. “However we cannot accurately model how management actions may play out in the future.”
The Financing and Leasing Association (FLA), which represents car lenders, has warned for months that a large bill could disrupt the car finance market, resulting in some providers offering fewer or more expensive loans, while others could go bust.
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The FLA’s director of motor finance, Adrian Dally, said: “Captive finance is there to provide the cheapest option to support the purchase of the manufacturer’s vehicles. That is its function. The FCA’s approach to assessing liability appears too broad to deliver fair outcomes and does not recognise where the customer received a really competitive deal.”
The figures surrounding carmakers’ potential bills were included in a 360-page consultation paper for the FCA’s redress scheme, which consumer groups, lenders and claims companies are still working to digest. There are concerns that some groups will deem the proposals unfair and the FCA proposals in court.
In a sign that carmakers are starting to prepare for the redress scheme, Hyundai Capital UK revealed earlier this week that it had put aside £34.5m for the motor finance issue for 2024, according to its latest Companies House filings.
The UK division of Honda Finance Europe (HFE) also said it had ringfenced £62.2m for compensation. The figures were released before the FCA announced its proposed scale of the compensation scheme, and therefore could be higher. The financial arm of BMW has put aside £200m to date.
HFE said that it was “currently working through the consultation paper to understand the next steps”.
“HFE will continue to support customers and respond to existing and new queries in due course,” it said.
The Guardian attempted to contact Hyundai Capital UK for comment.
