The backlash in car finance is growing as calls for £4bn to be taken from lenders

Monday, November 3rd, 2025, 6:00 p.m
| Updated:

Monday, November 3rd, 2025, 5:24 p.m

share

• 
  Share on Facebook
• 
  Share on Twitter
• 
  Share on LinkedIn
• 
  Share on WhatsApp
• 
  Share via email

The financial regulator is back in the hot seat as criticism of its controversial car finance compensation scheme continues to mount.

A new report from the All-Party Parliamentary Group (APPG) on fair banking has criticized the City regulator over a “£4.4 billion gap” in the proposed system.

The group accused the regulator of being “influenced by lenders’ profit margins”.

It represents a new round of criticism of the Financial Conduct Authority (FCA), which is also facing fierce opposition from the City’s banking giants. In fact, criticism comes from both sides, with some – including members of the APPG – claiming the system discourages lending, while many analysts and bank bosses believe it goes too far.

Consultation on the regulator’s proposals closes on November 18. The full overview of the redress system is expected in early 2026.

John Cronin, banking analyst at Seapoint Insights, said City AM: “Given the level of opposition, I expect the consultation to be extended beyond the deadline – and overall I expect some of the parameters of the proposed redress system to be weakened.”

The regulator estimates the total cost of the program at around £11 billion, at the lower end of previous expectations which had warned of a high of £18 billion.

No quiet solution to the motor vehicle finance dispute

The APPG criticized the FCA’s compensation rate for mis-sold loans, which the group said “has done more to favor the industry than any other aspect of the system”.

In August, the Supreme Court handed banks a modest victory, overturning the appeals court’s ruling that it was illegal for banks to pay a commission to a car dealer without the customer’s informed consent.

However, the Supreme Court upheld the case of one plaintiff, Johnson, finding that his excessive commission was “unfair.”

Top analysts believe Johnson received nearly 7 percent interest on his compensation package.

The FCA has proposed a rate of 2.09 percent for its system.

On the other hand, the city’s banking giants have criticized the regulator over figures they consider “disproportionate”.

Santander UK pulled the plug on its third quarter results last week, citing uncertainty around car finance, while bank boss Mike Regnier called on the government to actively consider intervention.

He warned that if the government does not intervene, “the unintended consequences for the car finance market, credit supply and the resulting negative impact on the automotive industry and its supply chain could have a significant impact on jobs, growth and the wider UK economy.”

Guard dog under fire

It follows a chorus of calls from bank bosses, including Lloyds’ Charlie Nunn, warning that the scheme could wipe out 20 years of profitability in the industry.

Lloyds increased its provisions to £2bn last month, while Barclays almost quadrupled its provisions to £325m.

RBC analyst Benjamin Toms said: “In our view there is still some risk that the final appeal process and the FCA definition of unfairness will be challenged in the administrative courts.”

Last month, City AM revealed that the FCA was accused of “massive overreach” after it sent letters to claims companies and law firms requesting detailed documents about its activities in motor vehicle finance cases.

Cronin added that if there is no clarity before the autumn budget – scheduled for November 26 – “this could influence the Chancellor’s decision on whether or not to increase bank taxes.”

A spokesman for the Financial Conduct Authority said: “We have proposed a scheme to compensate motor finance customers appropriately in a timely and efficient manner.

“We recognize that there will be differing opinions on the program and not everyone will get everything they want. But we want to work together to create the best program possible and quickly put an end to this issue. This certainty is critical to ensuring a trusted vehicle financing marketplace can continue to serve millions of families each year.”