The long-awaited consultation on motor finance compensation by the Financial Conduct Authority was broadly welcomed by analysts, though opinions differed on its financial impact.
Consumer redress of £8.2 billion to be paid by Lloyds Banking Group PLC (LSE:LLOY), Barclays PLC (LSE:BARC), Close Brothers Group PLC (LSE:CBG) and the rest of the industry is "towards the better end of expectations", said Deutsche Bank.
Citi felt that a total industry cost of £11 billion, also including £2.8 billion of administration costs, is "heavier than expected".
Analysts at RBC Capital Markets said the FCA had narrowed and lowered the sector impact versus earlier estimates, though it warned of possible legal challenges.
The FCA update last night was "a deep dive on what constitutes 'unfairness' in a motor finance arrangement", RBC said, viewing the resulting redress estimate on the banking sector as having been "narrowed and lowered".
However, the analysts said they are struggling to reconcile the likely impact on the banks with a section of the FCA's consultation document that states "banks account for circa 51% of total liabilities".
There is still also "some risk in our view that the final redress scheme and the FCA's definition of unfair gets challenged in the administrative courts", they added.
Panmure Liberum highlighted uncertainty over lender exposure and the high cost of administration, saying the costs to manage the process will be material, but will be deemed 'exceptional' by the companies, but are "nonetheless real costs with real implications for capital.
"The distraction to management will continue for some further years."
Cost to each lender
The FCA's estimate of motor finance compensation, published in its consultation paper, would have an impact of around £850 million on Lloyds, according to analysts at RBC Capital Markets.
For Santander UK, they calculated a combined payment of around £350 million, with £80 million for Barclays and roughly £170 million for Close Brothers.
This was less than most of the lenders have put aside, so the RBC calculations imply provisions releases at Lloyds of around £300 million and for Close Bros of about £2 million, with "adequate provisioning" at Barclays BARC.
Provision top-ups are expected for Santander and Bank of Ireland.
However, Citi analysts felt Lloyds may have under-provisioned.
Looking at a market share of the £11 billion total cost figure, this would imply a £1.54 billion charge for Lloyds, above its existing provision of £1.15 billion, analysts at the US bank said. "We expect any top-up to occur with 4Q25 results after the scheme is finalised and launched."
But it remains unclear exactly how the proposals will be applied to any market participant, Panmure cautioned, and therefore whether provisions established to date are adequate.
"Whether any lender was 'better' or 'worse' than average is unclear from the outside, while market shares will have varied over the very long period being considered."
Close Bros and sub-prime impact
For non-prime lenders, Panmure Liberum noted that the FCA text said some lender did not engage in discretionary commission or tied arrangements and therefore "are less likely to have to pay redress under the scheme".
To avoid paying compensation, these companies, such as Vanquis Banking Group PLC (LSE:VANQ), will need to provide evidence that the borrower could not have secured a better loan offer elsewhere.
"Ironically one of the original test cases involved [Lloyds' motor finance lending arm] Black Horse advancing a loan to a customer turned down by a number of other lenders."
With respect to Close Bros, the amount of provisions for redress of £165 million to date, at £700 per customer, would imply 236k customers, compared to Panmure's previous estimate that over 1.2 million customers had been served, where 44% of which would be 528k.
Ongoing sector impact
The FCA’s proposed redress scheme has "the potential to reshape the motor finance landscape", says Sushil Kuner, partner at law firm Freeths.
"However, the FCA is also clearly mindful of the lessons from the PPI redress programme, where overcompensation became a systemic concern.
"By embedding principles such as fairness, cost-effectiveness, and proportionality into the scheme’s design, the FCA is seeking to balance consumer protection with the need to maintain market stability and avoid undue financial strain on firms."