The UK’s Financial Conduct Authority (FCA) has issued a warning to motor finance firms to brace themselves for potential additional costs as it continues its review of car finance products. The FCA has been scrutinizing historical commissions for car loans since January, prompting lenders to take different approaches in preparing for the potential financial impact.

Lloyds Banking Group, the largest provider of car finance, has set aside a substantial £450 million to cover possible compensation and other costs related to the FCA’s ongoing investigation. On the other hand, Close Brothers has decided to forgo dividends for the 2024 financial year to bolster its balance sheet during the review process.

Interestingly, Barclays has chosen not to make a provision for the probe, citing its relatively low market share in the motor finance sector and a lack of significant complaints. However, analysts have warned that the FCA’s review could result in a hefty bill for banks, particularly as it focuses on past discretionary commission arrangements that incentivized car dealers to increase borrowing costs for customers.

The FCA emphasized the importance of firms maintaining adequate financial resources at all times and hinted at a possible extension of its probe due to legal challenges from Barclays and Lloyds regarding decisions made by the ombudsman for financial complaints. The regulator had previously paused the requirement for firms to respond to consumer complaints within eight weeks, with a promise to provide further guidance by September 24.

As the situation unfolds, motor finance firms are urged to stay vigilant and prepare for potential financial implications as the FCA’s review continues to shake up the industry.