A BIG bank has set aside £1.2billion to pay to victims of the car finance scandal.
Lloyds Banking Group put the money aside earlier this year but today said it would keep the provision for motor finance claims after the Supreme Court ruling last week.
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Although the court went largely in favour of the banks, it still left them facing millions of potential compensation claims.
In a statement, Lloyds Banking Group said: “The group currently believes that if there is any change to the provision it is unlikely to be material in the context of the group.”
It added that the provision will continue to be reviewed for any further information that becomes available, with an update provided as and when necessary.
The news comes after the Financial Conduct Authority (FCA) said yesterday that it would consult on a redress scheme for motorists who claim to have been overcharged.
It estimates that the total bill could be between £9billion and £18billion.
The cost is likely to be much lower than earlier estimates, which had suggested it could be more than £30billion.
This is because on Friday the Supreme Court overturned an earlier Court of Appeal judgement that had widened the scope of valid claims.
There had been fears that if the Supreme Court upheld the ruling it would have caused pain for Chancellor Rachel Reeves as it could have had a wider impact on the economy.
Fearing this outcome, major banks have already set aside more than £1.5billion to prepare for potential claims.
Banking analysts at RBC estimated the cost would be £11.5billion pounds, which if true would leave several banks with not enough cash set aside.
Other major banks have also reserved cash for potential car finance compensation payouts.
Among them is Santander, which has a reserve of £295million.
Meanwhile, Close Brothers has set aside £165million.
It gave no update on whether it would set aside more money in its update today.
Northridge and First Rand have also built up reserves of £143million and £140million respectively.
Who is affected by car finance?
Drivers who took out personal contract purchase (PCP) or hire purchase agreements before January 28, 2021 could be eligible for compensation.
Many of these motorists were impacted by “discretionary commission arrangements” (DCAs), which were in place for 40% of car finance deals before this date.
Under DCAs, brokers and dealers could increase the interest rates they charge drivers without informing them, allowing them to earn higher commissions.
The FCA banned these arrangements in January 2021.
As a result, anyone affected by a DCA could now be entitled to compensation.
You are unlikely to be able to claim compensation for a car finance agreement taken out before April 6, 2007 as this is when the Financial Ombudsman began to handle motor finance complaints.
Between 2007 and 2020, around 14.6million car finance agreements were made under DCAs.
But the FCA said that drivers who took out deals without DCAs could still be eligible for compensation if excessive commission was involved.
This could mean that drivers who signed up for a DCA after 2021 may be entitled to compensation depending on their circumstances.
Compensation claims will be assessed on a case-by-case basis.
Households with multiple vehicles could make more than one claim.
For example, a household could receive two payments of £950 each, which total £1,900.
What does it mean for you?
By Tara Evans, Head of Consumer
Millions of drivers will likely still be in line for compensation despite Friday’s landmark judgement – but the payouts will be lower and not as many people will qualify for them.
Despite the judgement, banks will still be responsible for any claims relating to discretionary commission arrangements (DCAs).
This is where drivers were charged excessive interest – and the higher they were the more commission they earned.
Those applied to around 40% of car finance deals.
The FCA has now confirmed that it will launch a car finance compensation scheme for drivers affected by this issue.
This consultation is set to begin by early October, and if the scheme is approved, the first payments could be made in 2026.
The FCA estimates that most drivers would receive up to £950 for each car loan.
However, the exact amount of compensation you may be entitled to will depend on the terms of your loan and the original cost of your vehicle.
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