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Lenders warned to hold back more cash amid car finance scandal

car finance mis-selling car dealership
car finance mis-selling car dealership

Motor finance lenders have been warned to set more money aside to deal with the car finance compensation investigation by the City watchdog.

The Financial Conduct Authority (FCA) has been reviewing variable commissions paid to secondhand car dealers since January after a surge in complaints.

The regulator said on Friday data was arriving too slowly from firms and warned some lenders were failing to properly brace for the potential financial hit.

Roma Pearson, director of consumer finance at the FCA, said: “While each firm will need to examine its own specific circumstances and these issues do not impact all firms in the same way, we would expect all firms to plan for any additional operational costs from increased complaints and, where applicable, to meet the costs of resolving those complaints.”

The watchdog added that all firms should assess whether they had enough cash to deal with the possible claims hit, and examine whether dividend payments should be prioritised over possible redress claims.

The motor finance scandal emerged earlier this year after the Financial Ombudsman Service, which deals with financial complaints, started to uphold claims by customers.

In some cases, it found that car finance brokers at dealerships had received higher levels of commission if they increased the interest rate on customer loans.

Lloyds Banking Group, the largest provider of car finance through its Black Horse division, has so far set aside £450m to deal with the costs of potential claims.

The figure is the largest so far but other lenders embroiled in the review have taken different approaches.

Close Brothers scrapped a dividend to preserve cash but did not take provision. Santander has also not taken any provision, saying it was too early to tell how it was affected.

Barclays has launched a judicial review of the proceedings of the Financial Ombudsman Service (FOS). The bank previously said it has small exposure to the issue.

The FCA said its review had generated uncertainty for the market but warned that companies under review had to start supplying more comprehensive data.

The watchdog is aiming to deliver its judgment on the matter by September 24 and could set up a compensation scheme for customer redress complaints.

Santander, Lloyds, Barclays and Close Brothers were contacted for comment.

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