Motor finance scandal and other misconduct to cost lenders £25bn

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

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

But he warned yesterday that in the past, such misconduct ‘has often been quite a significant headwind’.

He added: ‘We’ve been spending a lot of time on that issue.’

Lenders continue to count the cost of a recent Court of Appeal ruling on the way car dealers sold loans to customers to finance the purchase of vehicles.

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

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

Credit ratings agency Moody’s has estimated the total industry cost could reach £30billion.

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

The report said: ‘Some lenders face uncertainty over the potential for redress payments associated with certain historic commission payments.’

Woods told reporters: ‘We did not attempt to make a point estimate on that particular issue – what we did instead was take a crude but prudent approach.’

Instead, the Bank extrapolated assumptions it had made in previous ‘stress tests’ giving average annual costs of £5billion for ‘conduct’ issues and multiplied them over five years.

‘That’s a £25billion hit. Even while taking a hit of that size, the system still has plenty of headroom,’ Woods said.

‘We do not consider that issue to be a risk to financial stability. But misconduct has often been quite a significant headwind and our job is to make sure that we’re capturing that appropriately in the stress testing that we do.’

Lloyds Banking Group is among the lenders facing a potential major bill for compensation and has set aside £450million to cover the cost.

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

Two smaller lenders, Close Brothers and Investec, have also revealed that they continued to face uncertainty over the impact of the scandal. Lenders involved in the court case plan to appeal.

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

That is despite growing complaints from businesses that they face being battered by Labour’s Budget measures including a £25billion raid on employer National Insurance and a sharp increase in the minimum wage – as well as the introduction of a raft of new workers’ rights.

The report did point to more general risks facing smaller businesses as well as companies saddled with large debts, including those owned by private equity firms.

Asked about the negative impact of the Budget on companies, Bank of England governor Andrew Bailey said: ‘We are not at the moment seeing any sign of an increase in corporate distress.

‘But, as you would expect, we will watch very carefully to see how the effects of all of this pass through into both the corporate and the household sector.’

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