BMW UK’s finance arm has sharply increased the amount it has provisioned to meet potential compensation claims arising from the UK car loan mis-selling scandal. Accounts filed at Companies House, as reported by The Times, show a provision of £206.9 million by the end of 2024, up from £70.3 million a year earlier, highlighting the growing financial implications for captive lenders.

The mis-selling issue deals with undisclosed commission arrangements paid to car dealers, including discretionary commission schemes that incentivised dealers to charge higher interest rates to increase their own earnings. These arrangements were banned in 2021.

The Financial Conduct Authority (FCA) is consulting on an industry-wide redress plan covering loans between 2007 and 2020, with payments to affected consumers expected to begin next year.

Banks, captives and specialists

In August, Fitch Ratings estimated that of the £9–18 billion in potential costs, £5–11 billion may fall on banks, with the rest borne by non-bank lenders such as car manufacturers’ captive finance arms. While Fitch says this is largely “absorbable from earnings or actions already taken,” it expects banks will need to increase the £2 billion in redress provisions they’ve already set aside.

BMW’s provision of £207 million illustrates the unique pressures faced by captive finance arms. While the figure is smaller than provisions reported by major retail banks, it represents a substantial portion of BMW’s finance division capital, highlighting the per-vehicle exposure inherent in manufacturer-backed lending. Captive lenders’ portfolios are tightly linked to dealer networks and sales operations, meaning that even a relatively small increase in claim rates can translate into a material hit to profits and capital.

BMW has made clear that there is “considerable uncertainty” regarding the final cost of redress claims, and that a 5% rise in payouts would require an additional £31 million, as reported by The Times.

This explicit sensitivity disclosure underscores the financial leverage effect of claims on smaller, concentrated portfolios, and suggests that similar captive lenders could face significant variability depending on the FCA’s final scheme parameters.

Beyond the headline numbers, operational and administrative burdens will add to the impact. Processing claims, engaging with the Financial Ombudsman Service, and managing legal and customer-administration costs all contribute to the total cost.

BMW’s sharp increase in provisions may signify a benchmark for other captives. When compared with banks and other lenders, the data suggest that while larger institutions have higher absolute exposures, captive finance arms face concentrated per-vehicle costs and operational complexity that can make the financial and capital impact disproportionately large. The final scale of payouts will hinge on the FCA’s redress methodology, the number of validated claims, and the outcomes of ongoing complaints.

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