(Commonwealth_Europe) Bank of Ireland has set aside €172 million (£142 million) to cover potential compensation costs arising from the mis-selling of car finance in the UK. This move follows ongoing scrutiny of the car finance sector, where millions of motorists could be in line to receive compensation for what has been referred to as “hidden” charges associated with their car finance agreements.
In an increasingly complex and evolving situation, the Bank of Ireland’s decision comes amid broader developments across the UK car finance market. Last week, Lloyds Banking Group also raised the amount it set aside for similar compensation, tripling the figure to £1.2 billion. These actions stem from an inquiry by the Financial Conduct Authority (FCA), which has been investigating car finance deals and uncovering potentially unfair practices.
In the UK, car finance is a common method for purchasing both new and second-hand vehicles. Every year, customers purchase approximately two million cars through finance agreements, typically making an initial deposit and then monthly payments that include interest. However, some of these agreements have raised concerns, particularly regarding the transparency of the interest rates applied and the commissions car dealers receive for arranging finance.
One of the most significant developments in the sector came in 2021 when the FCA imposed a ban on car dealer commissions based on the interest rates charged to customers. This practice created an incentive for dealers to steer customers toward finance deals with higher interest rates than necessary, resulting in consumers being overcharged. The FCA’s action was aimed at protecting consumers from such practices. In addition to the 2021 rule changes, the FCA is now considering whether compensation should be offered to people who had car finance deals before these regulatory changes, further adding to the complexity of the issue.
Bank of Ireland’s car finance arm, Northridge Finance, is directly impacted by these developments. The bank has acknowledged the potential for compensation claims and has set aside the aforementioned sum in anticipation of the costs associated with them. However, it has noted that it expects further clarification on the matter in 2025, suggesting that the full scope of compensation and the overall impact on the bank’s finances may take time to fully materialize.
In addition to the car finance issue, Bank of Ireland recently reported a pre-tax profit of just under €1.9 billion for 2024, a slight decline from the previous year’s profit of €1.94 billion. Despite the minor dip in profits, the bank’s performance remains strong. Specifically, its UK division saw a notable increase in its underlying profit, rising by 27% from £239 million to £303 million. This growth is part of a larger strategic shift for Bank of Ireland’s UK operations, where the bank has refocused its efforts on more profitable lending opportunities, particularly in mortgages, while scaling back other areas of its business.
Myles O’Grady, the Group Chief Executive of Bank of Ireland, emphasized that the results reflect a solid overall performance in 2024. He further highlighted that the bank has built momentum across its various business lines, positioning it well for continued growth despite the challenges posed by the ongoing regulatory issues in the car finance market.
As the situation continues to evolve, with regulatory clarity expected in the coming months, the Bank of Ireland and other financial institutions in the sector are likely to face additional scrutiny and potential financial obligations. The ongoing changes in the UK car finance market are a reminder of the importance of transparency and fairness in consumer lending.
