Motor finance compensation estimates balloon

UPDATE: Close Brothers has announced that the group plans to recognise a provision in the H1 2025 financial statements in relation to motor commissions of up to £165 million. The move comes a year after the lender saw its share price plunge in the wake of the Financial Conduct Authority’s launch of a review into discretionary commission arrangements in the sector. 

The figure includes estimates for certain potential operational and legal costs, as well as estimates for potential remediation for affected customers. 

The lender notes that: “We have completed preparations for a significant risk transfer of assets in motor finance and continue to analyse any adjustments to the timing and structure of a potential transaction in light of the Court of Appeal judgment and our ongoing appeal to the Supreme Court. 

“The group continues to evaluate a range of additional potential management actions to further optimise risk weighted assets, including potential risk transfer of other portfolios, a continuous review of our businesses and portfolios and other tactical actions.”

Close Brothers also observes that “There remains significant uncertainty as to the range of outcomes from the motor commissions appeals and the FCA’s ongoing review of motor commissions and, therefore, the ultimate cost to the group could be materially higher or lower than the estimated provision.”

Uncertainty around the likely impact on lenders of potential motor finance claims is growing, with Ayvens announcing it has set aside €93 million for a potential redress scheme, and warning more may be needed, while research by US investment analysts suggests the total compensation bill for the industry could hit £28bn.

 Ayvens – which was born from the acquisition of LeasePlan by ALD Automotive – pointed out that October’s Court of Appeal judgment “moved the legal position substantially by expanding the scope of potential liability to commissions across a potentially extended range of products and services. The ruling left significant uncertainties as it included surprising and controversial aspects which are expected to be reassessed by the Supreme Court on appeal.”

In its FY2024 results Ayvens said its current provision is “based on various scenarios using a range of assumptions and probabilities. There are currently significant uncertainties as to the nature, extent and timing of any remediation action if required and the ultimate financial impact could be materially higher or lower than the amount provided.”

The lender initially restated its 2023 financial statements with a €69 million provision in light of last year’s FCA review announcement suggesting a likelihood of regulatory exposure on historic DCAs at year end 2023. Of this, €44 million related to LeasePlan UK impacting goodwill on acquisition, together with an €26 million provision impacting Q4 2023 and FY 2023 income statement and equity booked to cover liability in ALD UK.

Given the ruling from the Court of Appeal, that provision was increased to €93 million, impacting 2024 margins for €-20 million, of which € -18m is in Q4 2024 and € -4 million in OCI.

Banks under pressure

Other lenders have already reported taking a hit from concerns around possible car finance commission disclosure claims.  

 Santander UK, which saw a 38% decline in pre-tax profits to £1.33 billion for 2024, set aside £295 million in the third quarter to cover potential payouts and legal expenses, and has been subject to intense speculation that its Spanish parent is considering quitting the UK.

Last year saw motor finance leader Lloyds set aside £450 million while FirstRand bank, MotoNovo’s parent, took a R3 billion (£130 million) hit. BMW Financial Services (GB) has made a £70.3 million provision.

Final reckoning

Estimates of the total cost to banks have varied widely. RBC Capital Markets originally put the figure at around £18 billion, but the Bank of England gave “crude but prudent” estimate of some £25 billion in its Financial Stability Report published at the end of last year, and credit ratings agency Moodys has suggested a £30 billion bill is in prospect.

RBC has since suggested Santander could face a total of up to £1.4 billion in claims and costs, with Lloyds asked to find £3.2 billion, Barclays £400 million and Close Brothers £320 million.

Most recently, US investment firm Keefe, Bruyette & Woods (KBW), has released research predicting Lloyds’ liability could balloon to £4.2billion, while Close Brothers Group could face making £460 million in payments and Vanquis Banking Group could see a £29 million refund bill.

UK banks – KBW estimated total motor finance liability

In total, KBW expects the motor finance sector to end up spending approximately £28 billion in compensation.

Edward Peck, Asset Finance Connect CEO, said: “It is very clear that the ongoing uncertainty about the nature and timing of any redress scheme for mis-selling claims is hitting motor finance lenders, who are having to put aside funds which could otherwise be put towards innovation and growth plans, as the government has been urging businesses to do.

“A swift response following April’s Supreme Court hearing is now essential. At Asset Finance Connect we will continue to share insights and best practice across the motor and asset finance sector.”