UK Says Lenders Now Face £8.2 Billion Bill on Missold Car Loans

(Bloomberg) -- The UK’s Financial Conduct Authority said it now expects some of the country’s biggest auto lenders will spend £8.2 billion ($11 billion) to compensate customers who were missold car loans. 

The new estimate assumes 85% of eligible consumers would take part in the planned redress scheme, the watchdog said Tuesday in a statement. If everyone who’s eligible participates, the expected cost of compensation rises to £9.7 billion. 

“Many motor finance lenders did not comply with the law or the rules,” Nikhil Rathi, chief executive of the FCA, said in the statement. “Now we have legal clarity, it’s time their customers get fair compensation.”

The watchdog estimated that lenders have already fielded more than 4 million complaints from customers, and it’s proposing that firms contact those consumers before the scheme starts within three months. They will be included in the compensation program unless they opt out.

For those customers who have not complained, lenders will have to identify them and ask them if they would like to participate in the refund program. 

If there is 85% take-up, the estimated costs to firms of implementing and running the scheme would be £2.8 billion, the FCA said Tuesday. That would take the total cost to £11 billion. 

The FCA previously said it expected the scheme could leave lenders on the hook for anywhere between £9 billion and £18 billion, though at the time it considered analyst estimates in the midpoint of the range to be “more plausible.”

The extra details come after the FCA spent weeks consulting with lenders, law firms and other industry participants about how customers who were missold car loans should be compensated. 

The redress program is going ahead after the UK’s top court in August handed lenders a major reprieve, finding that banks should only pay compensation where the most serious abuse is found.

The long-running case weighed on the shares of UK lenders for months, with Lloyds Banking Group Plc Chief Executive Officer Charlie Nunn at one point arguing the case had made his industry uninvestible. It ultimately centered on the fact that a lot of British car dealers don’t just sell cars — they also arrange the loans that customers take out to buy them.

The key question for the Supreme Court was whether the motor dealers owed duties of care to their customers. On that, the judges ultimately found that dealers can act in their commercial interests, and dismissed most of the arguments that dealers selling loans for the banks must obtain consumers’ informed consent to charge commission.  

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