Two more car finance lenders question FCA’s compensation plan

A growing number of lenders are urging regulators to rethink plans to hand out billions of pounds in compensation related to the car finance commissions scandal. Bank of Ireland Group and Secure Trust Bank on Monday echoed complaints from Lloyds and Close Brothers last week, when they hit out at Financial Conduct Authority proposals that could see lenders pay out £11billion in compensation and other costs.

Both Bank of Ireland and Secure Trust Bank were also forced to significantly ramp up provisions set aside for compensations. Bank of Ireland told investors it now estimates its provision could increase from £143million to around £350million. The lender said the estimated increase is ‘due to the increased likelihood of a higher number of eligible cases, the construct of the proposed redress methodology and the customer engagement approach’.

While the final cost is subject to change, Bank of Ireland warned a £350million provision would reduce its CET1 ratio – an important regulatory measure of a bank’s financial strength – by 35 basis points to 16 per cent. Similarly, Secure Trust Bank said it expects to lift its provision from just £5million to £21million, comprising £16million in redress and £5million of costs. A provision of this size would reduce STB’s CET1 ratio by 50bps to 12.8 per cent. This is still well above the bank’s regulatory requirement for a CET1 ratio of 9.6 er cent, STB said.

Each lender took aim at the FCA’s methodology for proposed redress, which Bank of Ireland said does not reflect ‘the actual loss to customers or [achieve] a proportionate outcome’. It also claims the FCA’s proposed approach to assessing ‘unfairness’ does not align with a landmark Supreme Court judgement. The Supreme Court’s ‘Johnson’ judgement in August, which was seen as a partial victory for lenders at the time amid fears of even higher payouts, laid out the test for ‘unfairness’ with respect to car finance commission agreements.

Lenders argue the FCA’s definition of ‘unfairness’ in its proposed redress scheme differs significantly to the legal clarity provided by the Johnson judgement. Lenders fear the result will be that nearly every finance deal that included a discretionary commission agreement over the covered period would be eligible for payouts.

Among non-bank lenders, BMW was last week reportedly seeking an urgent meeting with the Treasury about the issue. STB said on Monday: ‘The FCA consultation paper provides further detail on its proposed redress approach, including significantly broadening the scope of the overall redress scheme, how unfairness would be assessed, time bar and proposed redress methodology.

‘Based on the FCA proposals in their current form, the potential impact is towards the extreme end of the range of previously expected outcomes.’ Research analyst at Shore Capital Gary Greenwood said: ‘Management believes the assessment of unfairness (in particular the inclusion of all DCAs and the low threshold for harm), is not aligned with the Supreme Court’s ruling.

‘This is consistent with recent comments made by other lenders, such as Lloyds, Close Brothers and FirstRand, which suggests there is likely to be significant industry pushback via the consultation.’