Car finance firms to face smaller compensation bill than previously thought over mis-selling scandal, specialist lender claims

The boss of a motor finance lender has said he expects the sector’s compensation bill from the ongoing commission payment scandal to be relatively modest.

Ratings agency Moody’s had estimated the total redress bill owed by the sector could be £30billion, but a top Financial Conduct Authority lawyer believes the figure may exceed the £50billion banks paid to settle payment protection insurance claims. 

But Anthony Coombs, who chairs Birmingham-based S&U, told investors that any ‘harm’ experienced by consumers would be ‘so marginal as to make demands for redress minimal’. 

In two months, the UK Supreme Court will hear an appeal brought by FirstRand and Close Brothers, who are challenging a landmark judgement last October that rocked the car finance industry.

Four months ago, the Court of Appeal ruled that lenders could not offer vehicle sellers a commission on finance deals without the ‘fully informed consent’ of the car buyer.

The verdict sparked a temporary near freeze in UK motor financing as lenders mulled the implications for current commission arrangements. 

But lenders have faced more existential concerns amid fears they will owe drivers billions of pounds in compensation. 

Decision: The Court of Appeal ruled that lenders could not offer vehicle sellers a commission on finance deals without the ‘fully informed consent’ of the car buyer

However, Coombs said it was ‘cautiously encouraging’ that the Supreme Court was taking a ‘common-sense approach’ to the matter.

He pointed to the court ‘sanctioning direct representations’ from the FCA, HM Treasury, and the Finance Leasing Association.

Gary Greenwood, analyst at broker Shore Capital, said if Coombs was right, ‘then this could have positive read across to other listed companies with material UK motor finance exposure’.

These include Close Brothers, Black Horse owner Lloyds Banking Group, Secure Trust Bank, and Vanquis Banking Group.

RBC Capital Markets recently estimated that Close Brothers could pay up to £640million in compensation, higher than its current market cap of £527million.

Following the Court of Appeal’s decision, the firm briefly paused all new lending for nearly a month last year.

S&U previously admitted the court case had ‘burdened’ its trading conditions but said on Tuesday that it had a more positive outlook due to ‘encouraging performance in other areas of the business’.

Deals in its Advantage Finance segment rebounded to over 900 in January following the end of a Section 166 probe that forced S&U to appoint a ‘skilled person’ to report on the division’s activities. 

Meanwhile, mortgage approvals in its Aspen Bridging subsidiary Aspen Bridging rose to 66,000 in December, its highest level for a year.

Coombs said: ‘Over the past year, macroeconomic and regulatory pressures on the business have severely tested S&U’s historic experience, expertise and resilience.

‘As a more pro-growth national agenda develops and the regulatory frenzy eases, then this provides a solid base for a return to more normal levels of profitability, growth and returns for our shareholders.’

S&U shares were 0.3 per cent lower at £16.25 on late Tuesday afternoon and have slumped by around 42 per cent over the past three years.

Close Brothers could be on the hook for compensation equivalent to almost 35% of its total net asset value 

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