Compensating UK consumers for mis-sold car loans could cost billions of pounds more than regulators have estimated, industry sources say, throwing into doubt plans for payouts in 2026 to resolve one of Britain's most expensive mis-selling scandals.
The Financial Conduct Authority published a consumer compensation proposal in October that it estimated would cost lenders about £11 billion, prompting companies such as Lloyds, Barclays and Close Brothers increase the level of funds they set aside.
But the FCA's methodology for calculating costs, which includes a broader-than-expected definition of what constitutes an unfair loan and a lower-than-expected bar for excessive commissions, has inflated the industry's bill, the sources said, with two floating estimates of closer to £18-20 billion.
Unless the regulator recasts its proposals, it is likely to face a costly and time-consuming legal challenge, the two sources and two other industry figures said, declining to be named because of the sensitivity of the subject.
While the sources say lenders are not expected to make public their estimates, they will raise objections in responses to an FCA consultation that closes today.
The dispute over the scale of the scheme spells uncertainty for lenders and their final provisions. The compensation scheme is also a test for the FCA, under pressure from Britain's Labour government to support economic growth by easing the regulatory burden on financial services.
A spokesperson for the regulator, which wants to finalise plans by the end of March and start payouts next year, said it had "engaged extensively" through the consultation and that feedback would help it to refine its proposals and ensure the scheme was "fair and robust".
"That's vital if we're to draw a line under this issue, with consumers fairly compensated and a motor finance market continuing to work well," the spokesperson said.
The watchdog wants the industry to pay for inadequately disclosed commissions paid by lenders to motor dealerships and contractual ties between lenders and dealerships that it says incentivised brokers to raise rates on car loans.
The £11 billion plan - £8.2 billion in redress and £2.8 billion in costs - is based on 85% of eligible consumers applying for redress over vehicle loans struck by lenders such as Lloyds, Bank of Ireland, Barclays, FirstRand and the finance arms of Toyota, BMW and Volkswagen over a 17-year period to 2024.
Some industry members and lawmakers say that current proposals are unreasonable and inconsistent with a Supreme Court judgment in August, noting the plan's lengthy time period introduces operational complexities.
The dispute centres in part on the FCA's definition of excessive commissions and its decision to label as unfair all "tied relationships", where dealerships introduce clients exclusively to lenders.
One of the sources said some in the industry felt the FCA had got its maths wrong, that shareholders would want to exhaust all legal options and that a 20 billion pound figure, "based on crude maths", was a "great negotiating number" to take directly to the finance ministry.
Did customers suffer losses?
The industry is also questioning whether the scheme's methodology reflects actual losses to customers - partly because some dealerships used commissions they earned to offer discounts for vehicle purchases.
Adrian Dally, director of motor finance at the Finance and Leasing Association, the lobby group leading the industry response, called for a quick resolution for everyone treated unfairly.
But he added: "For the redress scheme to be credible, it must only compensate those customers who have suffered loss."
Some lenders are taking their argument to the government, hoping for a sympathetic ear after British finance minister Rachel Reeves in January considered intervening in a landmark car loan mis-selling lawsuit. That was an effort to shield the motor finance industry, which accounts for 80% of new car sales.
BMW's financial services unit told Reuters it was in direct contact with the FCA and the government, while Santander UK's outgoing CEO Mike Regnier has called for government intervention and "material changes" to the proposals.
A UK finance ministry spokesperson said only that stakeholders should take part in the consultation and that the ministry wants the issue to be resolved in a way that provides "certainty for consumers and firms".
