The £11 Billion Typo: Why the Car Finance Scandal is the UK’s Next Financial Reckoning
In the fast-paced world of financial news, corrections are common. A misplaced decimal, a misattributed quote, a wrong date—these are the minor slip-ups that are quickly amended and often forgotten. However, a recent correction issued by the Financial Times regarding merchant bank Close Brothers was anything but minor. It was a single-word change that peeled back the curtain on a multi-billion-pound crisis brewing within the UK’s banking and automotive sectors.
The original article mistakenly stated that Close Brothers’ provisions to cover the car finance mis-selling scandal would increase by £165 million. The correction clarified the provision would increase from an existing £165 million (source). This seemingly small distinction is monumental. It signals that the initial sum was just a starting point, and the final cost remains a terrifying unknown. This isn’t just a problem for one bank; it’s a systemic issue that has put the entire UK banking industry on high alert, with analysts predicting a fallout that could rival the notorious Payment Protection Insurance (PPI) scandal.
This blog post will dissect the anatomy of the car finance scandal, explore the regulatory crackdown that triggered it, and analyze the profound implications for the economy, investors, and the future of financial technology.
The Anatomy of a Scandal: Deconstructing Discretionary Commission Arrangements (DCAs)
At the heart of this crisis lies a practice known as “Discretionary Commission Arrangements,” or DCAs. For years, this was a standard operating procedure in the motor finance industry. In simple terms, DCAs gave car dealers and credit brokers the power to set the interest rate on a customer’s car loan. The higher the interest rate they charged, the larger the commission they received from the lender.
Imagine going to buy a car. The lender, a major bank, tells the dealership that the base interest rate for you is 5%. However, under a DCA, the dealer has the discretion to offer you a loan at any rate up to, say, 9%. If they convince you to sign at 7%, they receive a significantly larger commission than if they had offered you the base rate of 5%. This created a fundamental conflict of interest, incentivizing brokers not to find the best deal for the customer, but the most profitable one for themselves.
This practice was widespread, affecting millions of car finance agreements signed before the practice was banned. The Financial Conduct Authority (FCA) identified the potential for significant consumer harm and, after a thorough review, banned DCAs effective from January 28, 2021. The FCA stated that the move was expected to save consumers £165 million a year. However, banning the practice was only the first step; the next was to address the harm already done.
The Regulatory Hammer Falls: The FCA’s Investigation and the Ghost of PPI
For a few years after the ban, the issue simmered beneath the surface. But in January 2024, the FCA ignited a firestorm by announcing a formal investigation into historical DCA practices. Citing a high number of complaints and conflicting court rulings, the regulator paused the 8-week deadline for firms to respond to customer complaints while it reviewed the situation. This move was a clear signal to the market: a major regulatory intervention was coming.
The announcement immediately drew comparisons to the PPI scandal, which ultimately cost UK banks over £40 billion in compensation. While the car finance issue may not reach those dizzying heights, the potential liability is staggering. The FCA’s investigation covers a
