Last week’s Treasury Committee hearing (on 20 May) saw MPs interrogating banking leaders over historic dealer commission models that could trigger significant customer redress. The spotlight was on Lloyds Banking Group, the market’s largest lender, which has set aside £1.15 billion in provisions related to potential misconduct.

Legal uncertainty

One of the issues prompting the call for evidence by the Treasury Committee is the use of discretionary commission arrangements (DCAs), a now-banned practice that allowed car dealers to set interest rates on loans in ways that increased their own commissions. The Financial Conduct Authority (FCA) banned DCAs in 2021, but questions remain over whether consumers were misled in the years before the change — and whether this constitutes retrospective harm under current law.

Charlie Nunn, CEO of Lloyds Banking Group, acknowledged that until 2017, its motor finance subsidiary, Black Horse, used discretionary commission structures. While Lloyds made a £450 million provision last year and a further £700 million this year following a Court of Appeal judgment, Nunn repeatedly told MPs that the bank has yet to see clear evidence of consumer harm.

“We have not had evidence of harm, although if it were identified, we would of course lean into it,” Nunn said, adding that clarity from the Supreme Court and the FCA would be critical to assessing any future remediation.

MPs press on consumer trust and broker conduct

Liberal Democrat MP Bobby Dean challenged the banks’ narrow interpretation of harm, citing constituents who relied on car finance for essential transport and were unaware their brokers were incentivised to offer more expensive deals.

“These are not add-ons like floor mats. This is a financial contract,” Dean said. “How can that possibly be an honest deal?”

Nunn responded by placing the practice within a “standard set of industry norms” and stressed that the FCA’s 2021 action ended such models. Still, the exchange revealed a disconnect between legal definitions of harm and consumer expectations of fairness and transparency.

Labour MP Yuan Yang also questioned how Lloyds could set aside such a large provision while publicly claiming it had not identified harm. Nunn clarified that the accounting provision reflected anticipated costs from handling customer complaints, many of which may not result in compensation, rather than an admission of liability.

Limited exposure for other banks

HSBC UK CEO Ian Stuart and NatWest Group CEO Paul Thwaite confirmed their banks had minimal involvement in motor finance. Barclays, which exited the market in 2019, acknowledged receiving inquiries and claims, particularly for older cases. CEO Vim Maru said the bank has hundreds of staff processing customer requests and preparing for potential further fallout following the Supreme Court’s judgment.

Only Lloyds appears significantly exposed to claims, with the bank’s share of the motor finance market — and use of discretionary commission arrangements —placing it at the heart of any future redress scheme.

Market implications and the FCA

Committee chair Dame Meg Hillier and MPs raised concerns about the impact of mass claims on bank operations and investor confidence. Some drew parallels with the PPI scandal, which resulted in over £38 billion in compensation payouts and a decade-long redress process.

Unlike PPI, however, this issue rests on legal judgments about whether the structure of commission payments inherently misled consumers — a question now before the Supreme Court, with a ruling expected by July.

The FCA has paused its own complaints-handling time limits until September 2024, pending that decision. If the Court upholds the Court of Appeal’s ruling and the FCA determines harm occurred, a formal redress scheme may follow.

Nunn warned of broader market risks: “Lack of clarity will create dysfunction… and real uncertainty around investment in the UK more broadly.”

Yet Dean noted that the market has already adapted to the new rules, with no significant drop in consumer demand or dealer activity. “Is there really a threat to the market from this decision being upheld?” he asked.

Motor finance sector awaits clarification

As the Supreme Court’s decision looms, lenders, regulators, and lawmakers must prepare for a potentially wide-reaching settlement that could reshape how consumer finance is offered and how misconduct is recognised.