Why the UK’s carmakers are sitting on a ticking time bomb

The car loan compensation bomb is set to drop – again. This week the Financial Conduct Authority (FCA) is poised to unveil its latest attempt at a scheme designed to compensate victims of the long-running overcharging scandal.The issue at hand is the commission paid to dealers between 2007 and 2024, which the regulator says consumers weren’t told about. More than four in every 10 agreements signed between those years could be eligible for compensation.The costs are substantial: an estimated £11bn in total, made up of £8.2bn in compensation and £2.8bn in admin expenses. That depends on takeup. If all eligible claims are filed, the compensation costs alone could hit nearly £10bn.True, it’s only a fraction of the £44bn that could have been due had a Court of Appeal judgement in 2024 not been overturned by the Supreme Court last November. The court ruled that dealers did not owe a “fiduciary duty” to consumers. They could, legally, steer them to a friendly lender and get paid for doing so. The court’s ruling went down badly. Claims firms said victims had been “robbed” of £4bn in an “insulting” car loan redress scheme.Trouble is, one claimant still succeeded, in part due to the sheer scale of the commission (a whopping 25 per cent of the advance of credit and 55 per cent of the total charge for credit, which was not disclosed). This was deemed an “unfair relationship” under the Consumer Credit Act. The Financial Conduct Authority also says the industry violated its rules.The industry is divided on where to go from here. It seems to think victims are after money they don’t deserve, helped by a regulator addicted to over-reach and an army of compensation-hungry types in the claims management industry.So what to do? Some of the big traditional lenders, the banks, will take the hit and toe the line because by now they just want the whole thing to go away. They’ve provisioned heavily. Lloyds, the biggest player, has set aside £2bn. They also know how to deal with mass compensation schemes. They’ve done it before, and they still have some of the people who handled the (much worse) PPI scandal knocking around who can be called upon. Some of the others remain seriously aggrieved, and may choose to challenge the regulator through the courts. A pincer movement is potentially forming here. Consumer groups, and/or claims companies could argue the scheme isn’t generous enough – and bring their own cases.It’s hard to understate the case for just how messy this could get. Some of the smaller lenders operating at the margins could go bust, adding a further complication.Carmakers with their own captive lenders also look as if they haven’t put aside anything like enough. “The carmakers have their heads in the sand over this,” I was told by an industry source.For example, BMW, which has a lender called Alphera, has provisioned £200m, just a tenth of what Lloyds has set aside. I’ve seen one analyst’s note currently circulating that estimates companies’ share of claims. It puts Lloyds at 17 per cent through Black Horse Finance and BMW (including Alphera) at around 9 per cent. So, even if Lloyds has over-provisioned – and banks are often quite conservative when it comes to that – you can see where there might be a problem.If carmakers have their fingers in their ears, it’s understandable. They’re already fed up with Brexit and grappling with intense competition from China. They’re not happy with Rachel Reeves’ electric vehicle road charging scheme, aka the EV poll tax, and they’re struggling to make money. Now this?What if they decide to give up on the UK as a bad job? That really is the last thing the government wants, given the economic cost. But by the same token, it really doesn’t want to have any involvement in sorting this out. Would you want to be the person denying voters the compensation they’ve been promised?The last time I wrote on this, I mentioned how handy it would be for the economy to get a multi-billion pound consumer compensation sugar rush. That was obviously before Donald Trump started dropping bombs on Tehran. Millions of consumer windfalls could now help stave off the very real threat of recession. Another reason for the government to cross its fingers and hope the FCA can sort it all out.A week or two after the FCA’s plan lands is when we’ll have a good handle on just how bad it could get. If the rumours circulating are true, some lawyers are going to get rich because it’s all going to end up in court. Again.