UK regulator lowers car finance mis-selling bill to $12 billion

UK car finance scandal to cost lenders $12 billion

Overview of the UK Car Finance Scandal and FCA Redress Scheme

By Kirstin Ridley and Phoebe Seers

LONDON, March 30 (Reuters) - The motor finance industry must pay around 9.1 billion pounds ($12 billion) to compensate UK motorists for unfair vehicle loans under the market regulator's trimmed, final bill for one of Britain's costliest financial mis-selling scandals.

The headline number, unveiled by the Financial Conduct Authority (FCA) after market hours on Monday, was lower than an originally proposed 11 billion pounds amid pushback during a consultation with the industry, which includes Lloyds, Barclays, Close Brothers and the finance arms of vehicle manufacturers.

The redress scheme has rattled the industry and tested the mettle of the FCA, which is seeking to draw a line under a 17-year scandal by balancing its duty to protect consumers from harm with government pressure to boost growth and competition by easing the regulatory burden. The FCA is also mindful of warding off legal challenges.

Inadequate Disclosure of Commissions and Commercial Ties

INADEQUATE DISCLOSURE OF COMMISSIONS, COMMERCIAL TIES

The FCA accuses the industry of inadequately disclosing commissions and contractual ties between lenders and car dealerships that it said encouraged brokers to hike vehicle loan rates between 2007 and 2024.

"We think this is a robust scheme, and we've listened very carefully to the feedback (and) where we've received evidence which is persuasive, we have made changes,"  FCA Chief Executive Nikhil Rathi told a news conference.

Industry Response and Provisions

Banks and vehicle manufacturers with finance divisions, which have collectively set aside billions of pounds for compensation, will now review whether they need to adjust their provisions or legally challenge the scheme.

Specialist lender Close Brothers said it was assessing the potential implications and would update the market when appropriate.

The lender's shares tumbled earlier this month on a short-seller report that it had misrepresented its exposure to the redress scheme. Close Brothers said it strongly disagrees with the report.

Legal Challenge Risk and Scheme Structure

LEGAL CHALLENGE RISK

In an attempt to insulate the plan from time-consuming court cases challenging the length of the redress package, the FCA has split it into two time periods. One will cover April 2007 to March 2014, and the other from April 2014 to November 2024.

Eligibility and Payouts

Under its final scheme, the FCA said 12.1 million purchase agreements were eligible for redress, fewer than under its original proposals, which were criticised for being so broad that they would compensate motorists who had not been treated unfairly.

As a result, it raised the expected average payout to around 830 pounds from 700 pounds per vehicle loan agreement. The FCA wants payouts to start this year.

Participation Rate and Cost Estimates

The lower headline number rests in part on the FCA's move to reduce its estimate of the proportion of eligible consumers likely to take part in the scheme to 75% from 85% in October.

Had the regulator not revised that assumption down, the overall cost would be little changed from the figure banks were presented with last year.

Asked about the adjustment, Rathi said it was "based on feedback". "Those numbers are estimates," he said. "Ultimately, the cost will depend on the actual level of take‑up."

Legal Opinions and Industry Outlook

Tom Dane, a financial services partner with law firm CMS, said the regulator had been "tinkering around the edges". Both Dane and Nathan Willmott, a partner at law firm Ashurst, said legal challenges from lenders and borrowers were possible.

"This all goes to show what a difficult job the FCA has ...," Willmott said.

Additional Information

($1 = 0.7583 pounds)

(Reporting by Kirstin Ridley and Phoebe Seers; Editing by Tommy Reggiori Wilkes and Keith Weir)