Will the motor finance scandal turn into a rolling car crash like PPI?

Phil Rolfe, Head of Financial Services, Valcon UK

The first fines for PPI landed in 2006 and the FCA finally closed the books on claims in 2019. During that time, the scandal cost the financial services industry around £50bn. And that doesn’t take into account the reputational cost to lenders, who were roasted by the media and the cost of running teams of remediation analysts to process the slew of claims. The emerging motor finance scandal is set to become the financial services industry’s next PPI.

What is the motor finance scandal?

The Financial Conduct Authority (FCA) is about to investigate car loans taken before January 28th 2021, when the law changed banning commissions based on ‘discretionary interest rates’. Basically, lenders and car dealers could offer whatever interest rates they liked and paid commission from the amount of interest customers paid. This gave firms the incentive to charge more and more interest, so they could maximise their commission. This happened at a time when interest rates, post the financial crash were at an all-time low.

The ambulance chasers

As with the PPI scandal and despite advice to always go direct for claims, this is a bandwagon that ambulance chasing claims companies will be jumping on in their droves, fuelling consumer interest and seeking to take more chunky commissions from redress payments. Be in no doubt that claims companies will be using social media to stoke the fires and get people on board.

Heads have already started to roll

The reality of the motor finance scandal is starting to sink in, and we are already – only days in – starting to see the repercussions. Close Brothers was the first to announce it has scrapped its dividend as they can’t reliably assess the financial impact the scandal will have on the firm – analysts have put their exposure at between £150m and £200m and Close Brothers is by no means a major player. Guaranteed there’ll be multitude other companies in the same boat. Industry analysts are estimating the total bill could be up to £15bn.

So what do you do now?

Organisations who are caught up in this new scandal have a choice:

  • Wait and see: either wait to see what the FCA decides (target end 2024) and then scramble to get ahead of the inevitable tsunami of claims, never quite investing enough in the tech, data or people to effectively manage the issue.
  • Act now: or invest now in finding the data, getting it in the right place and starting the analysis which will allow companies to quickly and effectively manage the situation no matter what the FCA decides.

For organisations going down the first route, this could mean being on the back foot for over a decade, if PPI is anything to go by, incurring mammoth long-running costs and negative headlines, as the claims rolls in.

For companies choosing the second option, they will have the chance to manage the window of redress down, settle the claims in an orderly and controlled manner and emerge on the other side with their reputation intact.

The issue goes back as far as 2007 and will run up to 2021 when the practice was banned by the FCA. All customers need to log a claim is the registration of their car and an idea of who the finance company was, or the dealership who acted as the middleman.

Where is all that data? Is it complete and available? Is it even digitised?

There is zero doubt the FCA will demand a response, so financial services companies are strongly advised to get their houses in order. And sooner rather than later. Investing in the right data processes now is the best decision – for organisations who were involved and who are culpable, it will demonstrate to the regulator they are willing to play ball. And it might just enable them stay a little bit ahead of a mob of aggrieved customers who, quite understandably, are baying for blood.

To find out how Valcon can help your business face this challenge, reach out to [email protected] today.