The Financial Conduct Authority (FCA) has instructed UK banks to be ready for a potential redress scheme in light of an ongoing Supreme Court case concerning the alleged mis-selling of motor finance. The regulator has confirmed that, should the Court uphold the case, it will announce within six weeks whether it plans to implement a redress scheme. This scheme would require banks to assess if customers were harmed by the mis-selling and provide compensation where appropriate, reducing the reliance on claims management companies, the FCA explained.
“A redress scheme would offer consumers a simpler path than filing individual complaints,” the FCA stated. “It would also allow firms to handle the process more efficiently, contributing to a more stable and effective market going forward.”
In response to the news, UK bank shares took a hit, with Lloyds Banking Group falling by 1.7% and Investec seeing a 1.2% drop.
The Supreme Court case, scheduled for April 1-2, revolves around whether motor finance brokers and lenders held a fiduciary duty to their customers when arranging car finance loans. The case could determine if “secret” commissions were charged, leading to overpricing for customers.
The outcome is critical for banks, as a ruling against the industry could result in compensation claims ranging from £6 billion to £44 billion, according to analysts. This would rival the cost of the previous payment protection insurance (PPI) mis-selling scandal.
RBC Europe analyst Benjamin Toms noted concerns over how banks will address claims from customers whose records may have been deleted after the mandatory seven-year retention period. He speculated that this might suggest the regulator may limit the redress scope to cases after 2007.
Both the Treasury and FCA sought permission to intervene in the case, with the court denying the Treasury’s request but allowing the FCA to participate.
Banks with the highest exposure to the issue have already begun setting aside funds for potential redress. Lloyds Bank has reserved £1.15 billion, while Close Brothers has allocated £165 million. Other affected banks include Bank of Ireland, Investec, Paragon, Santander UK, and FirstRand Bank. Close Brothers, with motor finance loans making up nearly 20% of its loan book, faces the largest relative exposure, followed by Bank of Ireland with around 13%. Lloyds, Santander UK, and Paragon have approximately 2-3% exposure, according to Fitch Ratings.
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