Bank of Ireland could more than double the provision set aside to deal with the fallout from the UK motor finance commissions scandal, now estimating it could have to pay out about £350 million (€403 million), it said on Monday.
The bank had set aside just £143 million, although in recent weeks admitted it would have to hike the amount after regulators unveiled a planned industry-wide compensation scheme.
The UK Financial Conduct Authority (FCA) estimated the total cost of the redress scheme could come to £11 billion, including £2.8 billion of implementation and operational costs.
That would result in estimated average compensation of £700 per affected motor finance agreement. Bank of Ireland has a 2 per cent share of the UK motor finance market, suggesting it would face a final bill of £220 million.
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However, in a statement on Monday morning, the bank noted the publication of the FCA’s consultation paper and said it had undertaken “an assessment” of the potential financial impact of the proposed scheme.
“The FCA’s proposals are subject to consultation and therefore may change,” it said. “Based on the proposals in their current form, the group now estimates that the provision could increase from £143 million to circa £350 million.”
It said the estimated increase was due to the “increased likelihood of a higher number of eligible cases, the construct of the proposed redress methodology and the customer engagement approach”.
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.
Bank of Ireland’s existing provision of £143 million at June 30th was based on “probability weighted scenarios” and captured the “then best estimate” of the redress and compensation that may have been payable to impacted customers.
It said the amount also took account of associated costs that may have been incurred by the group in connection with any FCA redress scheme or legal proceedings.
Bank of Ireland said the provision will be updated as part of the group’s full year 2025 financial reporting process, reflecting the final form of the redress scheme and any further relevant information.
It added that the final cost to bank could change depending on the outcome of the FCA consultation, actual customer opt-in rates, and any further legal, regulatory or industry developments.
If the provision was increased to £350 million, it would reduce the group’s “Common Equity Tier 1 ratio” of 16 per cent by about 35 basis points. The ratio indicates a bank’s ability to absorb losses and withstand financial distress.
Bank of Ireland added it continues to be “highly capital generative”, and that it was committed to achieving a fair outcome for customers. However, it added that it would be challenging the FCA on its methodology for redress.
“The group is committed to achieving a fair outcome for customers and ensuring that appropriate redress is provided where loss has occurred,” it said.
“However, the group does not believe that the FCA’s proposed redress methodology reflects the actual loss to customers or achieves a proportionate outcome.
“In addition, the FCA’s proposed approach for assessing unfairness does not align with the legal clarity provided by the recent UK Supreme Court judgement. The group will engage with the FCA on this basis.”
Bank of Ireland will issue its third quarter interim management statement on October 29th.
