Santander UK has urged the British government to step in over the Financial Conduct Authority’s (FCA) proposed car finance redress scheme, warning that the regulator’s plan could cause serious disruption to the credit market and the wider economy. The appeal marks an escalation in the industry’s response to what many lenders view as an overly broad and punitive approach to historic car finance sales.
The intervention underscores the scale of anxiety within the banking sector. The FCA’s consultation is expected to trigger one of the largest consumer compensation exercises in decades, potentially costing lenders between £9 billion and £18 billion. The dispute reflects a growing rift between banks seeking to protect balance sheets and regulators determined to restore fairness after years of opaque lending practices.
The Controversy
The ongoing controversy poses one of the most significant reputational and financial challenges the banking sector has faced in recent years. At the heart of the matter is the FCA’s treatment of motor-finance agreements, primarily those organised through discretionary commissions paid to car-dealership brokers.
Banks have understandably pushed back. Their principal arguments include that the proposed scheme would impose an unfair burden on lenders; would restrict the availability of credit; and would destabilise the motor-finance market and its associated supply chain. Santander, for example, has warned that without substantial changes to the FCA’s proposals, there could be detrimental consequences for jobs, growth, and credit supply.
Why Banks Are Unlikely to Succeed
However, notwithstanding these criticisms, there are compelling reasons to believe the banks will struggle to achieve a successful challenge to the scheme.
1. The Legal and Regulatory Momentum Is Strongly on the Consumers’ Side
The rulings and scholarly analysis emphasise that the structure of intermediated finance, where brokers receive commissions and the consumer is rarely fully aware of the impact, is inherently problematic. The FCA’s position is unequivocal: “a compensation scheme is the best way to settle, for both lenders and consumers, liabilities that exist regardless of circumstances.”
2. The Banks’ Ability to Challenge the Scheme Effectively Is Hampered by Uncertainty
Key parameters remain unresolved: the final scope of claims, the methodology for calculating loss, and the precise period to be covered. That ambiguity weakens any legal or negotiation position the banks might adopt.
3. Reputational Risk and Public Policy Pressure Make a Dramatic Reversal Unlikely
Given the political and media focus on fair treatment of consumers and the memory of previous mis-selling scandals (notably the PPI debacle), regulators and ministers are under intense pressure to deliver redress. The banks face significant challenges in an environment where public sentiment and regulatory expectations favour the consumer.
4. Structural Reform Is Overdue
While banks argue the scheme may restrict credit, the counter-argument is that structural reforms are long overdue in the motor-finance market, where over 90 per cent of new cars were financed, often under opaque terms.
5. Historical Precedent Does Not Favour the Banks
Previous scandals involving mis-selling (such as pensions, endowments and PPI) show that banks cannot easily out-negotiate or overturn broad regulatory redress schemes once they are in play.
The Implications
In summary, while banks are opposed to the scale and scope of the proposed car-finance redress scheme, their prospects of successfully blocking it appear limited. The combination of legal precedent, regulatory will, public policy pressure, and the structural vulnerabilities of the motor-finance market all converge against the banking sector.
For consumers who believe they may have been affected by unfair car-finance agreements, now is the time to act. Use our eligibility checker to assess whether you may qualify for compensation under the scheme. It takes just a few minutes and could open the door to meaningful redress.
