Uncertainty over UK car finance scandal is putting off investors, warn CEOs | Automotive industry

The car finance commission scandal is causing concern across the City about the UK’s approach to rules and regulation, with bosses and investors saying that the uncertainty is making it “difficult to operate”.

Lenders caught up in the scandal could be facing a compensation bill of up to £30bn, according to some estimates. But even companies that have no involvement in the alleged mis-selling of motor finance say it appears the authorities are allowing rules to be applied retrospectively.

“Where this creates a lot of challenge, is when you say: ‘look, as an industry participant, I’ve been doing everything to-a-T, and I’ve been doing everything the way I was told to do. Now I’m being penalised,’” said Kuba Fast, the chief executive of JP Morgan’s online retail bank Chase UK.

“It does not create a predictable business environment and it does make it quite difficult to operate [in the UK],” he added.

While Fast said it was not having an impact on JP Morgan’s plans to invest in its UK business, others say it is dampening the appetite of US investors for UK company shares. They claim there is concern that investing in regulation-abiding firms could prove futile, if those same firms end up being forced to pay out billions of pounds in compensation many years later.

Andy Briggs, the chief executive of pension and retirement fund provider Phoenix, said this proved to be a big distraction during a coast-to-coast tour of US institutional investors in the autumn.

“In the last week of October, I was over in the US … seeing 12 different large investors and trying to persuade them to buy Phoenix shares,” he told the House of Lords financial services regulation committee.

“They knew I don’t do motor finance, [but] every single one asked me [about the implications of the car finance scandal] as the very first question, because they are trying to assess the scale of that risk premium of investing in the UK, because of ‘retrospection’.”

The car finance commission scandal, which exploded last year, has shaken the City. It initially gained pace in January 2024, when the Financial Conduct Authority (FCA) launched an investigation into discretionary commission arrangements (DCAs) on car loans, after a flood of claims into the Financial Ombudsman Service. Banned in 2021, DCAs allowed car dealerships to earn more commission by setting higher interest rates, providing an incentive to make loans more expensive for consumers.

Analysts had expected the DCA scandal to result in a compensation bill of £8bn-£13bn for lenders including Lloyds and Santander.

But 10 months later, a shock court of appeal ruling in October opened up the otherwise contained investigation. Judges determined that failing to disclose the sum and terms of any commission arrangements on car loans – not just historic DCAs – amounted to a “secret” deal and was unlawful.

It caused panic among lenders and opened the door to a fresh wave of claims, including from claims management companies, which filed billions of pounds worth of court demands during the payment protection insurance (PPI) scandal earlier this century.

The car finance court ruling turbocharged compensation estimates, with rating agency Moody’s now predicting a bill of up to £30bn. There are also concerns that the ruling could end up applying to commission payments outside car finance, encompassing finance on anything from sofas to insurance.

Lenders involved in the motor finance court of appeal case – Close Brothers and the MotoNovo owner, FirstRand – are hoping to overturn the ruling at the supreme court. The hearing starts on 1 April.

An FCA spokesperson said that the regulator was “not applying rules around DCAs retrospectively. They added that the FCA was “reviewing whether firms complied with the regulations and laws in place at the time,” given there were rules about disclosure and treating customers fairly prior to its ban.

However, the potential fallout of the court case – which vastly expanded the scope of the commissions scandal – has put the FCA under intense pressure by creating uncertainty for firms.

Its chief executive, Nikhil Rathi, tried to address concerns in a letter to the prime minister, Keir Starmer, and the chancellor, Rachel Reeves, last week, amid concerns that UK regulators are stifling economic growth.

“Certainty and predictability underpin business and investor confidence,” he said, adding that, subject to the supreme court ruling and other legal issues, the FCA would provide clarity on potential compensation later this year.

“We can never rule out firms having to pay redress for serious misconduct,” Rathi’s letter said. “However, through proactive management of issues, and improved coordination with the Financial Ombudsman Service, we aim to prevent further significant FCA-led consumer redress exercises. As part of that, we are considering reforms to the redress framework which may need legislation.”