Santander UK has put aside £295m to cover potential payouts to car loan customers as the bank issued its first estimate of the financial fallout from the growing car loan mis-selling scandal.
The figures were released alongside the bank’s third-quarter results, which were delayed last month after a court of appeal ruling said it was unlawful for two lenders to have paid a “secret” commission to car dealers without borrowers’ knowledge.
The provision dented the bank’s pre-tax profits, which fell to £143m in the quarter, down from £413m in the second quarter.
Car lenders such as Santander UK had already been facing potential payouts over a Financial Conduct Authority investigation into a specific type of commission payment, discretionary commission arrangements,that was banned in 2021.
However, the court judgment went beyond the scope of the FCA investigation and City regulation, extending into common law and opening the door to a much larger compensation bill for motor loan providers.
Close Brothers and FirstRand, which owns the MotoNovo brand, have said they plan to appeal against the ruling in the supreme court. Filings are due by this Friday.
Analysts at RBC had previously estimated that the FCA investigation and court judgment could together end up costing Santander up to £1.4bn. Lloyds, which put aside £450m this year, is expected to be left with a £3.2bn bill, Barclays £400m and Close Brothers £320m.
Estimates of the total cost of compensation vary significantly, with the credit rating agency Moody’s suggesting that it could go as high as £30bn, the highest figure so far.
Large-scale lenders such as Lloyds, Barclays and Santander are financially able to absorb potential costs, said Moody’s. But smaller firms, including Close Brothers, Aldermore, Investec and the financing arms of Ford and Volkswagen, are facing a “more significant hit to earnings and capitalisation”, it added.
The rising estimates of the potential total costs have reignited speculation that it may be another payment protection insurance scandal in the making, which led to banks paying out nearly £50bn over more than a decade.
This year Nikhil Rathi, chief executive of the FCA, said he did not see the car loan mis-selling scandal “playing out as PPI did”.
“Not least because we have intervened early in the interests of market orderliness,” he told a finance conference in London in March.
Lenders have been scrambling to adapt to the court ruling and assess their position. Close Brothers and First Rand have temporarily halted new business in the UK, and Lloyds has scrapped all commission payments across its £15bn Black Horse car division.
Santander UK had originally been due to issue third-quarter results on 29 October, alongside its Spanish parent, Banco Santander, but delayed the release to give it more time to review the court of appeal ruling.
In the results on Wednesday, the company said: “Increased income from active price management, and a steadily improving economic environment were offset by a provision relating to historical motor finance commission payments.”
It said at the time that the judgment set a high bar for disclosing commission arrangements and ensuring that customers can consent to a loan. It said it believed that the ruling went beyond what was necessary under UK rules, and said it disagreed with the court’s decision.
Last week, the FCA said it would write to the supreme court, asking it to “decide quickly” whether it will allow the appeal to go ahead and “consider it as soon as possible, given the potential impact of any judgment on the market and the consumers who rely on it. If permission to appeal is granted, the FCA will consider intervening to share its expertise to assist the court.”
