A growing scandal over mis-sold motor finance could result in compensation bills of up to £30 billion for lenders, according to a warning from credit rating agency Moody’s. This latest estimate raises concerns that the issue could rival the scale of the payment protection insurance (PPI) scandal, which ultimately cost UK firms around £50 billion in redress.

The impact of the scandal may be more severe for smaller, specialist lenders, such as Close Brothers, Aldermore, Investec, and the financing arms of Ford and Volkswagen. While larger banks like Lloyds Banking Group, Barclays, and Santander UK may be better positioned to absorb the costs, Moody’s cautioned that these smaller institutions could face a “more significant hit to earnings and capitalisation.”

The motor finance industry has been under growing scrutiny since the Financial Conduct Authority (FCA) banned discretionary commissions in car loan deals in early 2021. These commissions, paid by lenders to car dealers or credit brokers for arranging finance, were seen as unfair, as they incentivised higher interest rates for borrowers.

The ban followed increasing consumer complaints about the commissions, leading the FCA to launch a comprehensive review in January, examining such payments dating back to April 2007. The ongoing investigation has prompted speculation that the regulator may soon require car loan providers to compensate affected borrowers.

In July, the FCA indicated that compensation for mis-sold finance was now “more likely than when we started our review.” Moody’s estimates the potential compensation costs could range from £8 billion to £21 billion for the industry.

The situation worsened last month following a Court of Appeal ruling, which determined that any undisclosed commission paid to a borrower was unlawful, making lenders liable to repay the money. This ruling applies to all types of commission, not just discretionary payments, and could add up to £9 billion to the compensation bill.

The judgment has caused turmoil in the industry, with some lenders halting car loan operations to ensure compliance. Close Brothers and Aldermore, central to the ruling, are planning to appeal to the Supreme Court. Meanwhile, Santander UK has delayed its third-quarter results to assess the financial impact of the judgment, with figures expected to be released Wednesday.

Uncertainty surrounds the scope of the ruling, with speculation that it could extend to other forms of consumer finance, which would amplify the potential fallout for lenders. Moody’s warned that a broader application of the judgment could have a “significantly more negative impact.”

So far, most banks and car finance arms have not set aside funds to cover potential compensation, with Lloyds Banking Group being one of the few to make provisions, earmarking £450 million. The scale of potential compensation payments has raised concerns about the stability of smaller lenders and the wider impact on the UK’s financial sector.

Donald Trump’s proposed tariffs on goods entering the United States could have a significant impact on the UK economy, with experts estimating a potential £20 billion hit to the country’s GDP. The President-elect’s plan to impose a 60% tariff on Chinese products and a 20% tariff on all other imports could lead to economic challenges for the UK, according to the Centre for Economics and Business Research (CEBR).

If the tariffs are implemented without retaliation from other countries, the CEBR projects that the UK’s GDP could fall by 0.9% by the end of a potential Trump administration, equating to a £20 billion reduction in economic output. Meanwhile, the National Institute of Economic and Social Research (NIESR) has forecast that even a 10% tariff could reduce the UK’s economic growth by 0.7 percentage points.

The CEBR emphasized that a free-trade agreement with the United States could be the most effective way to mitigate the negative economic effects. However, it acknowledged that challenges over issues like food standards could make such an agreement unlikely. Instead, the think tank suggested that the UK should focus on strengthening its position as a leader in green technology, particularly given Trump’s expected rollback of President Biden’s Inflation Reduction Act (IRA).

Economist Sara Pineros warned that the UK government faces a critical moment to take proactive steps to counteract the potential economic downturn. “The Chancellor faces a pivotal period to act on her pro-growth agenda and position the UK as a competitive destination for investment,” Pineros said.

She added that while the proposed tariffs and rising protectionism could pose significant challenges for the UK, there may also be opportunities to adapt and thrive under a new Trump administration. However, Pineros cautioned that without a clear strategy to strengthen the UK’s economic resilience, the country could bear the full brunt of the pain from Trump’s policies without reaping the potential benefits.

As the UK navigates the uncertain economic landscape of a potential Trump presidency, analysts urge the government to consider long-term strategies for securing economic growth and strengthening international trade relations. The outcome of these decisions could have far-reaching implications for the UK’s global standing and future prosperity.