Car loan scandal firms must hold enough cash to cover mis-selling complaints

The FCA is investigating the potential mis-selling of cars to consumers (Photo: Justin Tallis/ AFP)

The financial watchdog has warned banks and finance companies they should be holding enough cash reserves to cover the cost of complaints linked to its probe into mis-selling car loans.

The Financial Conduct Authority (FCA) told finance firms it would be monitoring their use of reserves and would intervene if they fail to carry out an adequate assessment of the costs.

It also said many firms were struggling to provide the data it has asked them for. Reasons for this include data being stored on multiple IT systems as well as being spread between lenders and brokers. In older cases it found firms had not retained all relevant records.

The FCA launched a review in January into whether thousands of consumers are due compensation for being overcharged for car loans, after high numbers of customer complaints.

Analysts warned that lenders could face a £16bn compensation bill as a result of the FCA investigation into the use of so-called discretionary payments which saw brokers and dealers raise consumers’ interest rates, with deals dating back to April 2007 being examined.

As many as four in 10 car finance deals had hidden “discretionary commission arrangements” (dca) where lenders allowed finance brokers and car dealers to increase the interest on a car loan to boost their commission. Motorists overpaid for the loan and did not challenge it as they were unaware of the practice. The FCA banned the secret deals in 2021.

The FCA said: “Firms involved in our review have engaged with us constructively. However, many firms are struggling to promptly provide the data we need.”

The watchdog has written to firms involved in the investigation to call on them to adequately engage with the process and ensure they have funds needed.

“We expect you to undertake an assessment of whether your firm’s financial resources are adequate,” the FCA said.

Consumer champion Martin Lewis said car finance mis-selling has the potential to be the “second-biggest reclaim payout in UK history” after the PPI scandal.

More than a million complaints have been submitted to loan firms using a tool created by Martin Lewis’s Money Saving Expert website. The tool, which helps users send complaints about mis-selling to companies without using a claims firm, has been used at a rate of 30,000 a day since its launch at the start of February.

Lloyds Bank Group has already told shareholders it has a provision worth £450m to cover potential costs.

The FCA confirmed that Barclays bank has launching a judicial review appeal against the Financial Ombudsman Service judgment which sparked the FCA review.

Lenders should continue to investigate complaints they receive in the meantime so they can be resolved quickly once the review is completed, the watchdog said.

The regulator said it expects to publish the latest review details in September.