Lloyds faces ‘conservative’ £4.2bn motor finance compensation payout, says funding financial institution

Motor finance lenders could be left with a £28billion compensation bill related to the historical mis-selling of loans, according to an investment bank’s latest forecasts.

Keefe, Bruyette & Woods (KBW), which is owned by Stifel, has raised estimates on the liabilities facing numerous lenders following the Court of Appeal’s recent Hopcraft judgement.

It now predicts Close Brothers Group will pay £460million, up from £350million, while Vanquis Banking Group will be hit with a £29million refund bill instead of nothing.

KBW has also more than doubled the anticipated liabilities facing Black Horse owner Lloyds Banking Group from £2billion to a ‘conservative’ £4.2billion.

In total, the New York-based business expects the motor finance sector to end up spending approximately £28billion in compensation.

In October, the court declared that it was unlawful for lenders to give vehicle sellers a commission on finance deals if the car buyer had not provided their ‘fully informed consent’ to the payment.

Hefty payouts: Motor finance companies could be left with a £28billion compensation bill related to the historical mis-selling of loans

The landmark decision could pave the way for the motor finance industry to pay tens of billions in damages to motorists.

KBW thinks this figure might be around £28billion, just below ratings agency Moody’s prediction of up to £30billion.

One senior Financial Conduct Authority lawyer has even said the overall compensation figure could exceed the PPI scandal, which cost UK banks £50billion.

However, the Supreme Court granted Close Brothers and the MotoNovo owner FirstRand permission last month to appeal the October ruling.

Barclays had previously failed in its attempt to overturn a January decision by the Financial Ombudsman Service (FOS) to rule against the bank in a motor finance case.

The FCA welcomed the ‘additional clarity’ brought by the High Court’s judgement, but Barclays said it would appeal.

Analysts at KBW said it was ‘perhaps unsurprising that UK banks have expressed uniform disbelief at the findings of both the Financial Ombudsman and the Court of Appeal with respect to sales practices in the motor finance market’.

Last April, the FCA urged car finance groups to ensure they had ‘adequate financial resources at all times’ to meet the costs of paying remuneration.

Close Brothers had already suspended dividend payments by then but agreed a few months later to offload its wealth unit to investment firm Oaktree Capital Management to boost its capital position.

The FCA began a probe into the motor finance sector in January 2024 following complaints from consumers claiming their compensation for so-called ‘discretionary commission arrangements’ were unjustly rejected by lenders.

Until they were banned in January 2021, DCAs enabled car dealerships and brokers to choose the interest rate on a vehicle buyer’s finance agreement, regardless of factors like the loan’s value or a customer’s credit score.

Regulators have given motor finance companies until 4 December to issue a final response to complaints regarding commission payments.

KBW’s estimates of compensation claims faced by lenders as a percentage of their tangible net asset value