The City regulator is set to take a significant step in addressing the car loan mis-selling scandal. This move comes as a response to a shock court ruling and aims to give lenders sufficient time to respond to the rising number of customer complaints. The Financial Conduct Authority has been under pressure to act, and this decision is seen as a crucial step in ensuring justice for consumers and maintaining the stability of the motor finance market.
Unraveling the City Regulator's Impact on the Car Loan Scandal
Regulator's Response to Court Ruling
The City regulator plans to intervene in the car loan mis-selling scandal, aiming to provide lenders with up to a year to respond to the increasing number of customer complaints. This decision follows a court of appeal ruling in October that deemed it unlawful for two lenders to pay a "secret" commission to car dealers without borrowers' knowledge. Lenders have expressed concerns that the ruling goes beyond FCA regulation and has created uncertainty about potential payouts to customers seeking compensation.Some lenders have been inundated with complaints, including from claims management companies and law firms. Consumers are eager to determine if they are eligible for a share of the compensation bill, which rating agency Moody's suggests could reach £30bn. The FCA's proposal to scrap the eight-week deadline for lenders to respond to customer complaints is seen as a way to ease the pressure. It suggests extending the deadline to either 31 May 2025, when the regulator plans to outline the next steps in its narrower investigation, or 4 December 2025.Nikhil Rathi, the FCA's chief executive, emphasized the importance of ensuring that consumers who are owed money receive it in an orderly manner. He stated that the court of appeal's ruling means many customers who bought a car using finance through a dealer could be entitled to compensation.Impact on Lenders and the Market
Lenders have been scrambling to adapt to the court ruling. Defendants like Close Brothers and First Rand are appealing the ruling at the supreme court, and their filings are due this Friday. Close Brothers and First Rand have temporarily halted new business in the UK, while Lloyds has scrapped commission payments across its £15bn Black Horse car division.Adrian Dally, the director of motor finance at the Financing and Leasing Association, welcomed the FCA's intervention. He believes it provides practical help for the industry during the interim period as they await a supreme court ruling.The FCA's announcement came as Close Brothers published its first-quarter results, which showed a nearly 50% increase in central costs compared to the same period last year. The lender spent more on legal and professional advice in response to the court ruling. Close Brothers has restarted some of its motor lending and is updating its documents to ensure customers are fully aware of commissions. Bosses stated that they are continuing to assess the impact of the ruling and plan to file their supreme court appeal "imminently."At this stage, Close Brothers is maintaining its previously communicated guidance for the 2025 financial year. However, they anticipate that there may be some financial impact from measures taken in response to the court judgment, including potential further increases in professional and legal fees and associated operational costs.The FCA will consult on both options and is expected to issue a final decision on 19 December. This decision will have a significant impact on the motor finance market and the rights of consumers. It remains to be seen how the various stakeholders will respond and what the long-term consequences will be.