Bank of Ireland has confirmed it will likely need to add to the £143 million (€167 million) previously set aside to deal with the fallout from the UK motor finance commissions scandal, after regulators unveiled a planned industry-wide compensation scheme.
The UK Financial Conduct Authority (FCA) said this week it estimates the total cost of the redress scheme could come to £11 billion, including £2.8 billion of implementation and operational costs. This would result in estimated average compensation of £700 per affected motor finance agreement. The plan is now out to public consultation.
Bank of Ireland has a 2 per cent share of the UK motor finance market, suggesting it faces a £220 million final bill.
“Pending finalisation of the consultation process, which could result in a refinement of the proposed scheme, based on our preliminary analysis and the characteristics of the proposed scheme, an increase in the provision is likely to be required which may be material,” Bank of Ireland said in a statement on Thursday afternoon. “This remains subject to ongoing analysis and review of the proposals.”
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RBC Capital analyst Benjamin Toms, who at one stage estimated that Bank of Ireland would need to set aside £950 million to cover costs, now forecasts a figure of £210 million. Goodbody Stockbrokers analyst Denis McGoldrick said on Thursday that he remains comfortable with his £231 million estimate for the group.
The FCA set up a review early last year into whether motor finance customers were being overcharged because of historical use of discretionary commission arrangements between car dealers and lenders. The examination covers 14 years before such arrangements were banned in 2021 in the market.
Discretionary commission arrangements involved lenders setting a minimum rate for car finance but giving brokers, typically forecourt salespeople, the discretion to set higher rates. Commission paid by the lender was linked to rates charged – meaning the higher the rate the car buyer pays, the more the broker gets.
Redress cost estimates have fallen sharply since the supreme court in London moved in early August to overturn key parts of a shock court of appeals ruling on test cases last year. The lower court’s ruling had threatened to leave motor finance providers facing massive bills for compensation over commissions paid to car dealers.
There had been a view at one stage that the final industry bill could match the almost £40 billion in redress UK banks paid in the 2010s for mis-selling payment protection insurance.
