Why motor finance could be banking’s next PPI car crash

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The world of used-car sales gets a bad rap. A UK regulatory review into motor finance commissions extends that stigma to the sector’s lenders.

Both the Financial Conduct Authority and the Financial Ombudsman Service (FOS), which handles consumer complaints, have investigations under way. This evokes memories of the long-running, and very expensive, payment protection insurance scandal. Any lenders funding motor finance should worry about how this problem could mushroom.

Merchant bank Close Brothers on Thursday decided to cancel its dividend for the full year to July, because of uncertainty around the probe. The bank, which offers nonprime loans for used cars, did not put capital aside for the potential costs.

The issue is the loans that used-car dealers offer their buyers, funded by banks. These range from Lloyds Banking Group (through its financing arm Black Horse) to Close Brothers and other smaller groups. Until the FCA prohibited the practice in January 2021, dealers collected a commission of varying size to connect the buyer with a lender. Some consumers complained about added, sometimes undisclosed, fees. Negative publicity fuelled the fire for redress.

It is hard to grasp the size of this problem yet. The PPI scandal, initially played down, blew up into a £50bn-plus problem for banks. One unknown is how far back compensation should go. The FOS jurisdiction over investigations like this only extends from 2007, which would mean a maximum period of 2007-2020. One compensation estimate, by Citi, came up with £9bn in possible charges for banks involved. Lloyds Bank would require £1.3bn.

Close Brothers might reasonably argue that its auditors would not accept a rough estimate without a clear timeframe. Instead the market has done the calculation. Its share price fell 26 per cent. Since the FCA’s announcement on January 11th — that…