Britain's car finance industry may escape what was anticipated to be one of the country's most expensive consumer banking scandals, despite hundreds of thousands of motorists potentially being involved.
The potential impact, once estimated by Moody's to reach £30billion across the industry, could be significantly lower according to industry insiders.
The development comes as major lenders prepare their financial defences against potential compensation claims.
Market turmoil stems from a Court of Appeal ruling that declared it unlawful for car dealers to receive commission from banks providing car loans without customer consent.
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The Financial Conduct Authority (FCA) has been investigating "secret" commission payments, known as discretionary commission arrangements, on car loans issued between 2007 and 2021.
These arrangements allowed car dealerships and brokers to set interest rates on loans, earning higher commissions in the process.
The FCA banned the practice in 2021, citing concerns that dealers were being incentivised to charge higher interest rates.
A landmark court case in October saw consumers triumph against two major lenders, with the court ruling against undisclosed dealer commissions.
The decision could force companies to pay billions in compensation, with the FCA set to decide by December whether to launch a customer compensation scheme.
Anthony Coombs, executive chairman of S&U, suggested that Government efforts to encourage responsible risk-taking for economic growth could prove beneficial as a landmark mis-selling case heads to the Supreme Court in April.
He added: "My view is that even should the Supreme Court uphold the lower court's decision in principle, any 'harm' found to have been suffered by consumers will be so marginal as to make demands for redress minimal."
Around 80 per cent of new vehicles in Britain are bought on finance, highlighting the scale of potential impact.
It comes as Close Brothers Motor Finance has announced it expects to set aside up to £165million in the first half of its financial year for potential legal and compensation costs.
The estimate follows what the lender called a "thorough assessment" of the case, though it warned of "significant uncertainty" surrounding appeal outcomes and the FCA investigation.
The company warned: "The ultimate cost to the group could be materially higher or lower than the estimated provision."
The announcement comes after Close Brothers cancelled its dividend and unveiled plans to raise £400million to strengthen its balance sheet.
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The lender stated its capital ratio would be affected by the provision, though it would remain above regulatory requirements, leaving it "well placed to absorb the impact of the estimated provision."
Close Brothers, alongside Lloyds, represents one of the two largest providers of motor finance at the centre of the scandal. Lloyds Banking Group has already allocated £450million for potential fines.
In a rare move, Chancellor Rachel Reeves has also sought to intervene in the case, with the Treasury submitting an application to contribute evidence over fears the case could "cause considerable economic harm" and make car loans both harder to obtain and more expensive.
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The potential impact, once estimated by Moody's to reach £30billion across the industry, could be significantly lower according to industry insiders.
The development comes as major lenders prepare their financial defences against potential compensation claims.
Market turmoil stems from a Court of Appeal ruling that declared it unlawful for car dealers to receive commission from banks providing car loans without customer consent.
Do you have a story you'd like to share? Get in touch by emailing [email protected]
The Financial Conduct Authority (FCA) has been investigating "secret" commission payments, known as discretionary commission arrangements, on car loans issued between 2007 and 2021.
These arrangements allowed car dealerships and brokers to set interest rates on loans, earning higher commissions in the process.
The FCA banned the practice in 2021, citing concerns that dealers were being incentivised to charge higher interest rates.
A landmark court case in October saw consumers triumph against two major lenders, with the court ruling against undisclosed dealer commissions.
The decision could force companies to pay billions in compensation, with the FCA set to decide by December whether to launch a customer compensation scheme.
Anthony Coombs, executive chairman of S&U, suggested that Government efforts to encourage responsible risk-taking for economic growth could prove beneficial as a landmark mis-selling case heads to the Supreme Court in April.
He added: "My view is that even should the Supreme Court uphold the lower court's decision in principle, any 'harm' found to have been suffered by consumers will be so marginal as to make demands for redress minimal."
Around 80 per cent of new vehicles in Britain are bought on finance, highlighting the scale of potential impact.
It comes as Close Brothers Motor Finance has announced it expects to set aside up to £165million in the first half of its financial year for potential legal and compensation costs.
The estimate follows what the lender called a "thorough assessment" of the case, though it warned of "significant uncertainty" surrounding appeal outcomes and the FCA investigation.
The company warned: "The ultimate cost to the group could be materially higher or lower than the estimated provision."
The announcement comes after Close Brothers cancelled its dividend and unveiled plans to raise £400million to strengthen its balance sheet.
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The lender stated its capital ratio would be affected by the provision, though it would remain above regulatory requirements, leaving it "well placed to absorb the impact of the estimated provision."
Close Brothers, alongside Lloyds, represents one of the two largest providers of motor finance at the centre of the scandal. Lloyds Banking Group has already allocated £450million for potential fines.
In a rare move, Chancellor Rachel Reeves has also sought to intervene in the case, with the Treasury submitting an application to contribute evidence over fears the case could "cause considerable economic harm" and make car loans both harder to obtain and more expensive.
Find Out More...