Car loan crisis could rival £50bn PPI scandal, FCA chief warns

The financial crisis brewing in the UK’s motor finance sector could rival the infamous £50 billion Payment Protection Insurance (PPI) consumer scandal, the Financial Conduct Authority's (FCA) top legal chief has conceded.

Stephen Braviner Roman, the FCA’s general counsel and executive director in charge of legal affairs, told the influential panel of lawmakers on December 10 that the fallout from hidden commissions on car loans could result in a much bigger industry-wide bill than previously thought.

The FCA had already been investigating "discretionary commission arrangements" (DCA), where buyers could have been overcharged when lenders allowed their intermediaries such as car dealers to increase the amount of car loan payments.

A Court of Appeal ruling in late October then upheld claims over hidden commissions, significantly broadening the range of potential compensation. Lower courts have been requested to pause many cases pending a Supreme Court ruling that could clarify the legal framework. It has now granted permission for the appeals to be heard before the end of March. although a ruling could take several months longer.

“We now need to take stock of the scale of that problem in light of the Court of Appeal decision,” Braviner Roman said, “do some further analysis looking at the wider implications of what that could be. It's premature, really, to say it will be a particular scale. We've previously said that looking at DCAs alone, we do not think it's the scale of PPI, but that was when we were looking at DCAs alone. So I think it would be premature to say it's definitely not the scale of PPI.”

The PPI scandal was a financial scandal in the UK that involved banks and other financial institutions mis-selling Payment Protection Insurance (PPI) policies to millions of customers.

Since 2021, Braviner Roman told the committee hearing, the FCA had seen hundreds of thousands of complaints and counter court actions in relation to commission, particularly discretionary commission arrangements.

“We intervened to take action, in relation to DCAs, because we could see a developing situation that was going to lead to potentially a disorderly, inefficient, unfair redress situation, both for consumers and for firms and for the functioning of the market," he said.

“The issues will always be challenging in these mass market type events where you're talking about uncertain interpretations of the law. There are different court rulings which have come up, and that's why it's gone to the most senior court in the country to try to work out what the right legal position is, and we will then take stock once we get there.”

MPs grilled the FCA chief on the regulator’s handling of the issue and the apparent breakdown of transparency requirements meant to prevent such problems. “Why did it fail so badly before this turned into a legal mess?” one committee member demanded.

“This has now ended up in a mess in the courts,” she said, “which is leaving consumers in a mess. The previous rules had to be transparent and so if they had to be transparent, how did they get away with it for so long before it got into this complicated legal mess? Why did it fail so badly, even before you got involved?”

“The generous interpretation,” Braviner Roman responded, “would be that as the market was developing, some ambiguity perhaps existed before we stepped in as to the understanding of what the requirements were. But … this has been in place for a long time. The practices pre-existed the requirements for transparency, pre-existed our work, and it was our work that really shone a light on it and stopped it.”

Braviner Roman also hinted at the possibility of a structured redress scheme. “We could go for a complaints-led approach or a system-wide solution,” he said.

“So, is it one in which, if you are dissatisfied, you complain and then you opt in? Or is it one where we say to the entire market, you have to go and trace all your customers over whatever time period is decided and paid. That is a choice,” he said, adding, that the system-wide measure “may be quicker, it may be easier to administer, as not all records are kept.”

The FCA chief also faced questions over the watchdog's remit to balance consumer protection and finance market stability. “This isn’t about favouring banks over consumers,” he insisted. “This is about ensuring the law is complied with, that consumers are treated fairly. It's not just consumers in the past, it's consumers for the future as well. We all have an interest in having a functioning car finance market that works well in the future too.”

Some MPs argued that such mass-scale compensation events could have been avoided with stricter preventative measures. “Why not stop these events before they spiral?” one MP asked.

“That's the reason for the Consumer Duty," he said, "to be able is to get more proactive and for us to intervene earlier. Secondly, we've been doing a consultation which is looking at our capital requirements for firms such that those who are getting more complaints that are likely to lead to redress. If we spot that early, they (are required to) hold more capital against it, so there are incentives in the system to address those issues. So, absolutely, we I don't think it's good for the system to have these kinds of events.”

The grilling by the panel of lawmakers follows the publication of a new report which damned the FCA as "widely seen as incompetent".

The All-Party Parliamentary Group (APPG) for Investment Fraud & Fairer Financial Service report said “there is compelling consensus among respondents that the regulator too often fails to perform its functions to a reasonable standard”.

“This view is particularly strongly held in relation to its consumer protection remit, where criticisms abound that it is slow to spot and identify fraud and other misconduct, its responses to such wrongdoing are slow and inadequate, and it is insufficiently assertive in securing redress for consumers and penalising perpetrators.”