The UK’s car finance scandal is sending shockwaves through the City, as companies brace for a potential £30 billion compensation bill and investors grow increasingly wary of regulatory uncertainty. Chief executives and industry figures are sounding the alarm, warning that the unclear rules and threat of retrospective enforcement are making it “difficult to operate” in the UK market.
A Scandal Unfolds
The controversy erupted last year when the Financial Conduct Authority (FCA) launched an investigation into discretionary commission arrangements (DCAs) on car loans. These agreements, banned in 2021, allowed dealerships to earn higher commissions by setting steeper interest rates—essentially incentivizing them to make loans more expensive for consumers.
But the real bombshell dropped in October, when a court of appeal ruling vastly expanded the scope of the inquiry. Judges determined that any undisclosed commission on car finance deals—not just DCAs—amounted to a “secret” arrangement and was therefore unlawful. This decision turbocharged the projected compensation costs, with rating agency Moody’s now estimating the bill could hit a staggering £30 billion.
Lenders in the Crosshairs
Major lenders like Lloyds and Santander are among those caught in the crossfire. They had already been bracing for hefty payouts related to the DCA investigation, but the court ruling opened the floodgates to a potential deluge of fresh claims.
Close Brothers and FirstRand’s MotoNovo unit, directly involved in the pivotal court case, are now pinning their hopes on overturning the decision at the Supreme Court. The high-stakes hearing is slated to begin on April 1st—and the outcome could have far-reaching implications not just for car finance, but commission arrangements in other sectors as well.
‘Difficult to Operate’
Beyond the eye-watering compensation figures, industry leaders say the real damage is being done by the climate of regulatory uncertainty. Kuba Fast, CEO of JP Morgan’s online bank Chase UK, warned that the retrospective application of rules is making it “difficult to operate” in the country.
“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,'” Fast said. “It does not create a predictable business environment.”
Phoenix CEO Andy Briggs encountered similar apprehension during meetings with US investors last fall. He said concerns over “retrospection” proved a constant distraction as he tried to pitch Phoenix shares.
“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,” Briggs told a House of Lords committee.
Regulator Under Pressure
Faced with this growing disquiet, the FCA finds itself in a difficult position. Chief executive Nikhil Rathi sought to reassure the government that the regulator aims to “prevent further significant FCA-led consumer redress exercises” and is considering reforms to the redress framework. But he also stressed that the FCA “can never rule out firms having to pay redress for serious misconduct.”
For now, all eyes are on the upcoming Supreme Court case—and the critical questions of how far the compensation net will be cast and whether lenders did in fact violate the regulations in place at the time of the alleged mis-selling. As the UK grapples with this thorny and potentially costly scandal, restoring a sense of regulatory certainty and predictability will be crucial to shoring up rattled investor confidence.
The Road Ahead
As the car finance scandal continues to unfold, its ultimate impact remains to be seen. But one thing is clear: the reverberations are being felt far beyond the automotive sector, as investors and companies alike grapple with the specter of sprawling compensation claims and mercurial regulatory stances.
For the UK, striking the right balance between consumer protection and fostering a stable, attractive business environment will be key. The challenge lies in holding wrongdoers accountable without upending the fundamental tenets of regulatory predictability and consistency. As one CEO put it, firms that play by the rules shouldn’t find themselves “penalised” years after the fact.
The coming months will be critical in charting this delicate course. The Supreme Court’s ruling, the FCA’s evolving response, and the wider reaction from investors and industry players will all help shape the contours of this still-developing scandal—and its lasting implications for the UK’s financial landscape.
