Santander UK has set aside £295 million to cover potential payouts from a growing car loan mis-selling scandal following a landmark court ruling last month.
The figure was released alongside the bank’s third-quarter results which were delayed following the high court ruling, which the bank said left it unable to calculate the potential cost of the legal decision.
The court found it unlawful for lenders to have paid a “secret” commission to car dealers without borrowers’ knowledge. That followed an investigation by the Financial Conduct Authority (FCA) into a specific type of commission payment, discretionary commission arrangements, a practice whereby the fees earned by the dealer were linked to the interest rates paid by the customers.
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Discretionary commission arrangements were banned in 2021.
The money put aside to cover the costs of the court ruling took a significant chunk out of Santander’s pre-tax profits for the quarter, which fell to £143m from £413m in the previous three months. Santander said the provision “includes estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions”.
“There are currently significant uncertainties as to the nature, extent and timing of any remediation action if required and the ultimate financial impact could be materially higher or lower than the amount provided,” the bank added.
Analysts at RBC had previously estimated that the FCA investigation and court judgment could together end up costing Santander up to £1.4 billion. Lloyds, which put aside £450m this year, is expected to be left with a £3.2bn bill, Barclays £400m and Close Brothers £320m.
Close Brothers and FirstRand, which owns the MotoNovo brand, have said they intend to appeal against the ruling in the supreme court. Filings are due by Friday.
Estimates of the total cost of compensation vary greatly. Credit rating agency Moody’s said earlier this week that the motor financing industry as a whole could be hit with as much as £30bn in redress and legal costs, the highest estimate so far.
The rising estimates of the potential total costs have reignited speculation that it may be another payment protection insurance (PPI) scandal in the making, which led to banks paying out nearly £50bn over more than a decade.
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Earlier this year Nikhil Rathi, chief executive of the FCA, said he did not see the car loan mis-selling scandal “playing out as PPI did”.
“Not least because we have intervened early in the interests of market orderliness,” he told a finance conference in London in March.
However, industry executive yesterday criticised the FCA, telling a House of Lords hearing that it was an example of how poor regulation was deterring lending and holding back economic growth.
Stephen Haddrill of the Finance and Leasing Association, the trade body that represents many car finance providers, said the UK regulatory regime was “not conducive to lending”. He said the FCA had “failed” by not ruling that commissions paid by finance companies to car dealerships should be disclosed long ago.
Santander UK had originally been due to issue its third quarter results on October 29 alongside its Spanish parent, Banco Santander.
Elsewhere in its results, Santander said its Common Equity Tier 1 (CET1) capital ratio had increased to 15.4% despite a 19 basis point impact from the motor finance ruling. CET1 compares a bank's capital against its risk-weighted assets to determine its ability to withstand financial distress.
“We remain well capitalised with significant buffers over regulatory requirements," Santander said.
The update came on the heels of news that Banco Santander is cutting more than 1,400 jobs across its UK business this year as part of ongoing efforts to reduce its cost base. The group had 21,812 workers in the UK at the end of September, according to its latest financial report.
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