Car manufacturers are under pressure to find a further £3 billion to cover motor finance compensation after company filings suggest several captive lending arms have significantly underestimated their share of the Financial Conduct Authority’s redress scheme.
While the FCA’s final compensation plan, published last month, put the total cost of the scheme at £9.1bn, a report by investment bank RBC Capital Markets reckons that around 42%, or £3.8bn, is expected to fall on the motor finance divisions of manufacturers.
Read Motor finance redress: from commission to compensation
After examining the latest filings by manufacturers, it estimates that collectively they have set aside just £803 million, leaving a shortfall of about £3bn ahead of the scheme which is due to begin this summer.
RBC Capital Markets reckons that lenders not tied to carmakers, including Lloyds, Santander and Barclays are expected to shoulder 57% of the total bill and appear to be better prepared, having already set aside £3.9bn of the £5.2bn they are likely to face.
Of the £9.1bn total, roughly £7.5bn is expected to go directly to customers, with the remainder covering administration costs such as tracing victims, processing claims and making payments.
Motor finance payout gap
The compensation scheme is intended to compensate motorists who were overcharged for vehicle finance between 2007 and 2024 because of commission arrangements between lenders and car dealers. The FCA has estimated affected customers could receive average payouts of £830.
The scale of the bill has fuelled concern across the motor finance market, with lenders warning that major compensation costs could force some providers to scale back lending or exit the market altogether.
MotoNovo’s owner, FirstRand, announced earlier this month that it was to exit the UK’s motor finance market with the South African group criticising the FCA redress scheme as “disproportionate and unfair”.
Carmakers provisions
Among the manufacturers, RBC Capital Markets reports that Mercedes-Benz has provisioned the largest amount so far at £424m, followed by BMW at £207m, Renault at £74m, Ford at £61m and Stellantis at £37m. Toyota is reported to have set aside funds without disclosing the figure, while Volkswagen and Ferrari are reported to not have made provisions so far.
Benjamin Toms, an analyst at the investment bank RBC Capital Markets whose team compiled the lenders’ provisions, told The Guardian: “There are probably three reasons why UK banks have been more proactive in their provisioning.
“Firstly, because this issue was more material for them. Secondly, UK banks will place a high level of importance on their relationship with the regulator, and thirdly, finance goes more to the heart of banks’ day-to-day operations relative to car manufacturers where finance is a side arm.”
Lenders and consumer groups have until 5pm on 27 April to challenge the FCA’s scheme and its estimated compensation bill, which could potentially delay payouts.
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