UK motor finance scandal reawakens ghost of PPI

11 April 2024/No Comments
By Nick Dunbar

Consumer mis-selling is a perennial operational risk for banks, which has now reared its head in UK motor finance. Close Brothers is bolstering capital by £400 million and Lloyds Banking Group has added provisions of £450 million, as they wait for an FCA review into mis-selling of motor finance loans. Other big lenders include Barclays and Santander which have yet to announce the financial impact.

The scandal has echoes of payment protection insurance (PPI), where over an eight-year period between 2011-2019, the biggest UK banks paid more than $60 billion in compensation to customers. These losses can be tracked using the Risky Finance banking tool.

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As with motor finance, PPI was linked to commissions and consumers were unaware of the costs involved, which could increase loan repayments by as much as a third. Although fines were levied on lenders as early as 2007, it was not until a High Court ruling in 2011 that banks were forced to provide redress on legacy products.

A similar ‘slow burn’ quality makes bank analysts nervous about motor finance, where the problem arose because of the way banks originated car loans.
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