Consumers Face Potential £10bn Shortfall in Motor Finance Compensation
Motor finance customers could receive significantly less compensation than initially anticipated, following Rachel Reeves’ intervention in an ongoing financial scandal.
Analysts suggest that the total payout for individuals who may have been mis-sold car loans is likely to be much lower than earlier estimates, after the Chancellor stepped in to support major banks in a High Court case.
On Wednesday, stockbroker Shore Capital revised its forecast for Close Brothers, a major motor finance provider, reducing its expected compensation bill from £450m to £300m. This adjustment reflects a shift in sentiment from the Government, which analysts say could substantially reduce the overall industry payout from an estimated £30bn to £20bn—a potential £10bn decrease.
Government’s Role in the Compensation Debate
The Chancellor has emphasized the importance of safeguarding the banking sector as part of the Government’s broader economic strategy. Her intervention in a Supreme Court case concerning potential compensation obligations has raised expectations that the legal ruling may favor lenders, potentially reducing the financial burden on banks.
Following these developments, Close Brothers set aside £165m to cover costs related to the car finance investigation—a figure lower than many had predicted.
Impact on the Industry
Gary Greenwood, an analyst at Shore Capital, commented:
“The expected compensation amount appears to be trending downward, and given the Treasury’s involvement, this could be a significant reduction rather than a minor one. The era of PPI-style large-scale payouts seems to be over.”
However, he also noted that compensation obligations will vary among lenders, meaning some banks may still face higher costs than others.
Similarly, Benjamin Toms of RBC Capital suggested that his initial projection of a £17.8bn industry-wide payout seems more likely than the previous worst-case estimate of £32.7bn.
He added:
“Regardless of the outcome, the regulator will need to determine the next steps, which could include the introduction of a structured compensation scheme. Recent developments indicate that the Government is pushing for a scheme that minimizes the financial impact on banks.”
Legal Proceedings and Historic Claims
The Supreme Court is set to review the case in April, where judges will determine whether customers were mis-sold car loans due to undisclosed “hidden commissions.”
Historically, banks and specialist lenders paid commissions to car dealerships, with some agreements—known as discretionary commission arrangements (DCAs)—allowing dealers to adjust interest rates for borrowers in exchange for higher commissions.
Although DCAs were banned in 2021 by the Financial Conduct Authority (FCA), a 2023 ruling by the Financial Ombudsman Service has opened the door for mis-selling claims dating back to 2007.
The outcome of this case could have significant financial implications for both lenders and consumers, shaping the future of motor finance compensation in the UK.
