UK regulator warns banks to prepare for costs tied to motor finance probe

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The UK’s top financial regulator has warned UK lenders that they should be prepared to cover the cost of a spike in complaints linked to a regulatory probe into the potential mis-selling of historic car finance loans.

In a letter published on Friday, the Financial Conduct Authority told lenders it would monitor their financial resources and use “regulatory tools to intervene if we find your firm has not undertaken any assessment of adequacy of financial resources or may be at risk of not having adequate financial resources”.

The watchdog also said it would step in if it identified “any actions that appear to be an attempt to avoid potential future liabilities”.

“We have observed firms taking different approaches to account for the potential impact of [the probe] . . . so, we are writing to firms to remind them they must maintain adequate financial resources at all times,” the FCA added.

The regulator launched an investigation in January into historic discretionary commission agreements on car loans, a practice that allowed car dealers to set their own interest rate on repayment plans until it was banned in 2021.

Analysts estimate that the cost for lenders facing compensation claims could range from £6bn to £16bn for the banking industry, though uncertainty about what potential redress could look like means it is too early to reliably estimate the probe’s precise impact.

Lloyds Banking Group, which owns the UK’s largest car finance lender Black Horse, has already set aside £450mn to cover the potential costs of the probe.

Close Brothers, another exposed lender, said last month that it had “no legal or constructive obligation” in relation to the probe and had not booked a provision as a result. The FTSE 250 bank, however, suspended its dividend and announced a £400mn plan to bolster its capital provision in anticipation of a potential hit.

The FCA told lenders that it expected them to “analyse the impact of making any capital reduction, such as dividend payments” on their abilities to meet potential future liabilities linked to the probe.

The watchdog said it would update the market on next steps in September. However, it warned that many companies were “struggling to promptly provide the data we need” and said it would extend its review if it did not receive “comprehensive data promptly from a range of firms”.