Bank of Ireland sets aside €429m to pay compensation relating to UK motor finance scandal

Bank said it was 'committed to achieving a fair outcome for customers, ensuring appropriate redress is provided where loss has occurred'

Lenders involved in the scandal should expect to pay a combined £7.5bn (€8.64bn) in compensation. Picture: Jason Alden/Bloomberg

Bank of Ireland has set aside €429m for compensation payments relating to the UK’s Financial Conduct Authority’s (FCA) redress programme for consumers who were mis-sold car loans.

On Monday, the FCA published the final details of the redress scheme, which “modestly” tightened the conditions for borrowers to receive compensation, meaning 12.1 million loans are eligible, down from 14.2 million last year.

Lenders should expect to pay £7.5bn (€8.64bn) in compensation, down from £8.2bn previously, and the estimated costs of running the “streamlined” redress scheme are now 40% lower, the FCA said. This means the programme is set to cost the industry £9.1bn overall, down from £11bn in the previous version.

That approach will cheer affected firms, including banks such as Lloyds Banking Group and car firms with lending operations such as Mercedes-Benz Group. The industry has spent months arguing the regulator’s proposals were too strict and failed to take proper account of last year’s Supreme Court ruling.

The redress focuses on people whose motor finance deal included a “discretionary commission arrangement” (DCA), a particularly controversial type of car finance banned in 2021.

With DCA, lenders gave dealers the power to set the interest rates, with dealers getting more commission the higher the rate. This allegedly gave dealers an incentive to overcharge customers. It is the lenders — typically banks — who are on the hook for the compensation.

A number of cases also involved an arrangement between the lender and the dealer that gave the lender exclusivity or first refusal when it came to providing credit, which was not properly disclosed, and unfairly high commission, which was also not properly disclosed.

In a statement published on Tuesday, Bank of Ireland said its “cumulative provision in relation to UK motor finance commissions is €429m” as of the end of December.

“The group is assessing the potential financial impact of the final scheme and is committed to achieving a fair outcome for customers, ensuring appropriate redress is provided where loss has occurred,” the bank said.

Other firms involved in the scandal have already set aside billions of pounds to pay affected customers. Lloyds has taken the largest known provision, at almost £2bn. Mercedes-Benz, Bank of Ireland Group Plc and Barclays Plc are among the firms to have taken nine-figure charges.

“There’s nothing stopping lenders moving tomorrow if they wanted to,” though they are likely to take some time to digest the details before repaying customers, Nikhil Rathi, chief executive of the FCA, said on a media call. 

“We’re going to be holding lenders’ feet to the fire.” Under the new version of the programme, the FCA said the average redress payment will rise slightly to £829 per customer, up from about £700 in the original plan. This is offset by a lower estimated take-up rate of about 75% of eligible customers, down from 85%.

Operating costs have been cut through measures such as no longer requiring banks to send letters to customers by recorded mail, according to the regulator.

Most customers will get back an average estimated loss, plus interest. About one in three payments will be capped because “consumers should not be compensated more than if they had been treated fairly”, the FCA added. A small number of people who bought very valuable vehicles are also excluded.

Just 90,000 customers will get back all the commission they paid plus interest, the FCA said, limiting this compensation to those who were charged “very high” commission.

Borrowers who took out loans before 2014 will be treated separately, the FCA said, with a slightly higher average interest rate applied. Banks have raised concerns that older cases might be missing paperwork — one element that could lead to a legal challenge to parts of the compensation programme.

The FCA said on Monday it would work with other regulators to tackle any law firms and claims management companies that treat customers unfairly, for example through high exit fees or false advertising.

Additional reporting Bloomberg