The ongoing car finance commission scandal in the UK has raised concerns among investors and business leaders about the country’s regulatory approach, with many stating that the uncertainty is making it “difficult to operate.”
Estimates suggest that lenders involved in the scandal could face compensation costs as high as £30 billion. However, even companies not implicated in the alleged mis-selling of motor finance are expressing concerns that the authorities are retroactively applying rules. This situation has created a sense of unpredictability within the industry.
Kuba Fast, CEO of JP Morgan’s online retail bank Chase UK, explained the challenge: “When you’re an industry participant, doing everything by the book, and then suddenly find yourself penalized for it, it creates a lot of uncertainty. It does not foster a predictable business environment, and it makes operating in the UK quite difficult.”
While Fast noted that the scandal has not impacted JP Morgan’s investment plans in the UK, others argue that the uncertainty is dampening the interest of U.S. investors in UK company shares. These investors are concerned that even regulation-abiding firms could be forced to pay billions in compensation years after the fact, rendering their investments less appealing.
Andy Briggs, CEO of pension and retirement fund provider Phoenix, highlighted the extent of this concern during his tour of U.S. institutional investors in the autumn.
He shared with the House of Lords Financial Services Regulation Committee that every single one of the 12 large investors he met with asked about the car finance scandal, despite Phoenix having no involvement in motor finance. They were keen to understand the potential risk premium of investing in the UK due to the issue of “retrospection.”
The scandal first gained traction in January 2024, when the Financial Conduct Authority (FCA) launched an investigation into discretionary commission arrangements (DCAs) on car loans, following a surge of complaints to the Financial Ombudsman Service.
DCAs, which were banned in 2021, allowed car dealerships to earn higher commissions by setting higher interest rates, which resulted in more expensive loans for consumers.
At first, analysts predicted that the scandal would lead to a compensation bill of £8 billion to £13 billion for lenders such as Lloyds and Santander. However, in October 2024, a surprising ruling by the Court of Appeal expanded the scope of the investigation.
The judges determined that failing to disclose the terms and amounts of commission arrangements on car loans, not just the historic DCAs, was an unlawful “secret” deal. This ruling caused panic among lenders and opened the door for new claims, including from claims management companies that previously filed billions of pounds in court demands during the PPI scandal in the late 2010s.
As a result, compensation estimates surged, with Moody’s now predicting a bill as high as £30 billion. There are also concerns that the ruling could extend beyond car finance and apply to commission payments in other sectors, including finance for items like sofas and insurance.
Lenders involved in the case, including Close Brothers and FirstRand, which owns MotoNovo, are seeking to overturn the ruling at the Supreme Court, with hearings set to begin on April 1.
An FCA spokesperson emphasized that the regulator is “not applying rules around DCAs retrospectively.” The spokesperson clarified that the FCA is “reviewing whether firms complied with the regulations and laws in place at the time,” particularly since there were rules regarding disclosure and fair treatment of customers even before the ban on DCAs.
However, the fallout from the Court of Appeal’s decision has put the FCA under significant pressure, as it has created uncertainty for firms. In response, FCA Chief Executive Nikhil Rathi sent a letter to Prime Minister Keir Starmer and Chancellor Rachel Reeves last week, addressing concerns that UK regulators may be stifling economic growth.
.In his letter, Rathi emphasized that “certainty and predictability underpin business and investor confidence” and stated that the FCA would provide further clarity on potential compensation once the Supreme Court ruling and other legal matters are resolved later this year.
Rathi acknowledged that firms may still need to pay redress for serious misconduct but added that the FCA, in collaboration with the Financial Ombudsman Service, is working to prevent further significant compensation exercises. The FCA is also considering reforms to the redress framework, which could require legislation.