UK watchdog warns over car loans investigation into finance firms

Analysts have said the review could land banks with a multibillion-pound bill as the watchdog probes so-called discretionary commission arrangements

Discretionary commission arrangements, that incentivised car dealers to increase a customer’s borrowing costs, were banned in 2021.

The UK's Financial Conduct Authority, or FCA, has warned motor finance firms to begin preparing for additional costs that may arise from its review of car finance products after lenders in recent months diverged on whether to take an immediate hit to earnings.

The watchdog, which has been reviewing historical commissions for car loans since January, said all firms needed “to plan for any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints”.

Lloyds Banking Group, the biggest provider of car finance, has set aside £450m (€527m) to pay for possible compensation and other costs linked to the FCA’s ongoing probe. 

Close Brothers, where one-fifth of the loan book is dedicated to motor finance, has said it will not pay any dividends for the 2024 financial year as it looks to strengthen its balance sheet while the review continues.

But Barclays opted not to make a provision for the probe because it has a relatively low market share in the motor finance business and it has not received a material number of complaints, Anna Cross, the bank’s group finance director, told analysts in February.

“There’s clearly the FCA review ongoing,” Ms Cross said at the time. “There are a number of potential outcomes from that. And so, at this point, we have not sought to make a provision,” she said. 

Analysts have said the FCA’s review could land banks with a multibillion-pound bill as the watchdog probes so-called discretionary commission arrangements, a practice the agency banned in 2021 that incentivised car dealers to increase a customer’s borrowing costs.

“We have observed firms taking different approaches to account for the potential impact on their financial resources of historic use of DCA arrangements that may have breached laws and regulations in force at the time,” the FCA said in a Dear CEO letter on Friday. 

“We are therefore writing to remind firms that they must maintain adequate financial resources at all times," it said. 

The watchdog also said it may have to extend its probe now Barclays has filed a legal challenge to a decision that centred on the bank’s motor finance business by the UK’s ombudsman for consumers with financial complaints. 

The FCA in January said it was aware auto lenders were facing a deluge of complaints from consumers alleging their auto loans were priced in a way that treated them unfairly. 

At that time, the regulator paused a requirement that firms respond to these complaints within eight weeks and promised to outline next steps by September 24.

It may have to extend that pause as Barclays continues with its request for judicial review. Lloyds has also said it is reviewing a similar decision by the ombudsman. 

• Bloomberg