Santander sets aside £295mn to cover costs over car finance ruling

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Santander UK has set aside £295mn to cover the potential costs of a British court ruling on unlawful commissions that banks paid to car dealerships.

The lender on Wednesday became the largest institution to announce such a provision since the Court of Appeal ruled last month on the mis-selling of car loans.

The figure was published with Santander UK’s full third-quarter results, which the Spanish-based bank delayed last month in order to calculate the potential cost of the decision.

The court said it was illegal for banks to pay a commission to a car dealer without obtaining the customer’s informed consent.

The ruling increased the likelihood that the Financial Conduct Authority, the UK regulator that continues to investigate potential mis-selling, will establish a costly redress scheme for lenders.

Credit rating agency Moody’s this week estimated that the motor financing industry as a whole could be hit with as much as £30bn in redress and legal costs, affecting lenders such as Santander and Lloyds Banking Group.

Lloyds, which owns Black Horse, the UK’s largest motor finance provider, in February set aside £450mn to cover the potential costs of the car loan probe.

The situation echoes the £50bn payment protection insurance (PPI) scandal, the industry-wide mis-selling of cover for credit card and loan repayments that blew up into a costly problem for banks.

Industry executives on Wednesday criticised the FCA over the car financing controversy, 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, head 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.

Haddrill also said the industry was “bemused” by the Court of Appeal judgment, which “seems at odds not just with the regulatory framework but with the interpretation that there has been in the law before then”.

The FCA said last week: “Firms authorised by the FCA must meet wider legal requirements as well as regulatory rules. The interpretation of common law is rightly for the courts.”

Santander said its £295mn provision included “estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions”.

It added: “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 FCA’s probe centres on the historic use by lenders and brokers of now banned “discretionary commission agreements” on car loans, a practice whereby the fees earned by the dealer were linked to the interest rates paid by customers.

The two lenders directly affected by the court’s judgment — Close Brothers and FirstRand — are seeking permission to appeal against it in the UK’s Supreme Court.

Santander UK said its CET1 capital ratio increased in the third quarter to 15.4 per cent despite the impact of the provision, which it put at 19 basis points.

“We remain well capitalised with significant buffers over regulatory requirements,” it said.