Car finance scandal and other misconduct costs lenders £25 billion

Misconduct, including the burgeoning scandal in the car finance sector, could cost lenders at least £25 billion, the Bank of England has warned.

Sam Woods, the Bank’s deputy governor, said it was not considered a risk to Britain’s financial stability.

But he warned yesterday that such misconduct in the past has “often created significant backlash”.

He added: “We have spent a lot of time on this issue.”

Lenders continue to count the costs of a recent Court of Appeal ruling on the way car dealers sold loans to customers to finance vehicle purchases.

In a ruling that stunned the industry, the court said it was illegal for dealers to receive a commission from those banks without the customer’s informed consent.

The Financial Conduct Authority (FCA) has said this means many customers who took out a loan through a dealer may be owed compensation.

Credit rating agency Moody’s estimates that the total cost to the sector could be as much as £30 billion.

Woods set out the Bank of England’s response as it published its biannual Financial Stability Report, which assesses the health of the UK financial system and its ability to cope with major stresses, both from Britain and globally.

The report states: ‘Some lenders are facing uncertainty about the potential for reparations related to certain historical commission payments.’

Woods told reporters: “We didn’t try to make a point estimate on that particular issue; instead we took a rough but cautious approach.”

Instead, the Bank extrapolated the assumptions it had made in previous ‘stress tests’, which put the average annual cost of ‘behavioral issues’ at £5 billion, and multiplied them over five years.

‘That’s a £25 billion hit. Even with a hit of that magnitude, the system still has plenty of wiggle room,” Woods said.

“We do not view this issue as a risk to financial stability. But misconduct has often been a significant headwind and it is our job to ensure that we take that into account appropriately in the stress tests we conduct.”

Lloyds Banking Group is among lenders facing a potentially large compensation bill and has set aside £450 million to cover the costs.

Santander UK, meanwhile, has set aside £295 million.

Two smaller lenders, Close Brothers and Investec, have also revealed that they are still facing uncertainty about the impact of the scandal. Lenders involved in the lawsuit plan to appeal.

The Bank’s broader assessment in yesterday’s report found that ‘UK household and business borrowers are likely to remain resilient’.

That’s despite growing complaints from businesses that they are facing the fallout from Labour’s budget measures, which include a £25 billion raid on employers’ national insurance and a sharp increase in the minimum wage – as well as the introduction of a range of new employee rights.

The report did highlight broader risks facing smaller companies, as well as those saddled with large debts, including those of private equity firms.

Asked about the budget’s negative impact on businesses, Andrew Bailey, governor of the Bank of England, said: ‘We’re not seeing any sign of an increase in business problems at the moment.

‘But as you would expect, we will be keeping a very close eye on how the effects of all this ripple through both businesses and households.’