Motor Finance Mis-Selling: The Tip of the Iceberg

Millions Set Aside – But Nowhere Near Enough

The motor finance mis-selling scandal has already seen lenders setting aside significant provisions to cover potential compensation claims.

However, history tells us that these initial figures are often vastly underestimated.

The banking sector has a long track record of underplaying financial liabilities in order to avoid alarming investors and the markets.

The approach being taken now mirrors what happened during the PPI scandal, where early estimates were a fraction of the final cost.

Why Lenders Set Aside Small Amounts at a Time

Banks and finance providers have a vested interest in keeping their provisions as low as possible for as long as they can.

Large provisions can send shockwaves through the financial markets, reducing investor confidence and impacting share prices.

By drip-feeding relatively small amounts, they aim to minimise panic and maintain stability.

This strategy was clearly seen in the PPI scandal, where initial provisions were a mere fraction of the eventual payout.

At first, banks set aside a few hundred million pounds—by the time all claims had been settled, the total bill exceeded £40 billion.

What Has Been Set Aside So Far?

So far, major motor finance providers have collectively set aside similar to what they initially set aside for PPI to cover potential compensation claims.

However, given the sheer scale of the issue, these amounts are unlikely to be anywhere near enough.

As the true extent of the scandal begins to be uncovered, these provisions will inevitably rise, just as they did with PPI.

Could the Final Bill Surpass PPI?

Many analysts believe that if the Supreme Court upholds the Court of Appeal’s ruling from 25th October, the cost to lenders could potentially exceed the £40 billion PPI payout. Here’s why:

• The Number of Affected Consumers – Tens of millions of motor finance agreements have been taken out since April 2007, the date when claims can be made from. The FCA has suggested that up to 99% of motor finance agreements were subject to a commission being paid by the finance provider to the dealership. The Court of Appeal ruled that failure to disclose the amount of commission to the consumer to be unlawful.
• Average Compensation Per Customer – Even if the average claim results in a refund of £1,000, with tens of millions of agreements affected, the total payout could be astronomical.
• Scale of the Market – The UK motor finance sector is worth hundreds of billions of pounds, and a systemic issue affecting a significant percentage of agreements means total liabilities could be massive.

Let’s Consider a Rough Calculation:

• If 3 million successful claims with an average compensation of £1,000, the total liability would be £3 billion.
• If 20 million successful claims with an average compensation of £1,000, the total payout would be £20 billion.
• If the issue is wider-reaching and affects 99% of motor finance agreements, the final bill could exceed £40 billion, bringing it in line with or even surpassing PPI.

The Importance of Full Compensation

With such significant amounts at stake, it is crucial that consumers are fully compensated for the mis-selling they have suffered.

Just as with PPI, the financial industry must be held accountable for its systemic breaches of transparency and fairnes, and lessons must be heeded.

The Supreme Court’s ruling will be pivotal in determining whether lenders will be forced to compensate consumers appropriately.

As the scandal unfolds, one thing is certain: the provisions set aside so far are just the tip of the iceberg.

The real financial reckoning for lenders is yet to come.

YOUR MONEY CLAIM