The ripples from last year’s landmark Financial Conduct Authority ruling on motor finance commission arrangements continue to spread across the lending landscape. Paragon Banking Group has become the latest institution to quantify its exposure, setting aside £6.5 million to address potential compensation claims related to historical motor finance practices.
This provision, revealed in Paragon’s most recent trading update, reflects the growing financial impact of regulatory scrutiny that has fundamentally changed how lenders operate in the auto finance sector. The company expects this sum to cover both administrative costs and potential customer remediation payments stemming from discretionary commission arrangements that were commonplace before the FCA’s intervention.
“We’ve taken a prudent approach to addressing historical commission structures that no longer align with regulatory expectations,” explained Nigel Terrington, Chief Executive of Paragon Banking Group. “While we’ve moved entirely to fixed-fee arrangements in our current motor finance operations, we recognize the need to address legacy issues comprehensively.”
The provision comes amid Paragon’s strategic pivot toward broker-led motor finance, which saw lending volumes increase by 7.2% to £246 million in the nine months ending June 2023. This shift toward intermediary channels appears to be a calculated response to both regulatory changes and evolving market dynamics.
Industry analysts view Paragon’s disclosure as relatively modest compared to larger players in the motor finance sector. Close Brothers, for instance, set aside £400 million earlier this year, while Lloyds Banking Group allocated a staggering £450 million to address similar concerns through its Black Horse finance arm.
The disparity in provisioning reflects Paragon’s comparatively smaller motor finance book and its historical approach to commission structures. According to Sarah Williams, financial services analyst at Hargreaves Lansdown, “Paragon’s exposure appears manageable within their diversified lending portfolio, unlike some competitors who face potentially existential challenges from these regulatory issues.”
The FCA’s ruling, which took full effect in January 2021, banned discretionary commission arrangements that allowed dealers and brokers to adjust customer interest rates to secure higher commissions. This practice, the regulator determined, created conflicts of interest that weren’t transparent to consumers and potentially increased borrowing costs.
Current estimates from financial consultancy EY suggest the total industry cost for remediation could exceed £1.5 billion, though significant uncertainty remains about the final figure. Some industry observers believe even this substantial sum may prove conservative if compensation patterns follow the trajectory seen in the payment protection insurance (PPI) scandal.
For Paragon, the provision represents approximately 2.6% of its annual pre-tax profit, a manageable hit that hasn’t significantly dampened investor confidence. The company’s shares dipped just 1.2% following the announcement, suggesting market participants had largely anticipated this development.
Beyond the immediate financial impact, Paragon’s disclosure highlights the broader transformation underway in auto finance. The sector is moving toward more transparent fee structures, enhanced disclosure requirements, and stricter oversight of dealer-lender relationships.
“We’re witnessing a fundamental rebalancing of power between finance providers, dealers, and consumers,” noted Michael Thompson, director at automotive finance consultancy MotorCredit Advisory. “The commission scandal has accelerated reforms that might otherwise have taken years to implement.”
The timing of Paragon’s announcement is particularly noteworthy given the FCA’s ongoing investigation into historical commission practices. The regulator is expected to publish its findings later this year, potentially establishing a framework for systematic compensation similar to the PPI redress program.
For consumers who financed vehicle purchases before January 2021, these developments may eventually translate into compensation opportunities. The FCA has advised consumers to await formal guidance rather than engaging with claims management companies that have already begun soliciting potential claimants.
Industry experts caution that determining eligibility for compensation will likely prove complex. “Unlike PPI, where the product itself was often unnecessary, discretionary commission arrangements involve nuanced assessments of whether consumers actually paid more than they should have,” explained consumer finance specialist Rebecca Jenkins of the Financial Rights Action Group.
What’s clear is that Paragon’s £6.5 million provision represents just one small piece of an industry-wide reckoning that continues to unfold. As more lenders quantify their exposure and regulatory guidelines evolve, the full financial and structural implications for the motor finance sector remain to be seen.
For now, Paragon appears to have weathered the initial storm with minimal disruption to its broader business strategy. The company’s shift toward broker-led lending and diversification beyond motor finance has positioned it to absorb these regulatory costs while maintaining overall growth momentum.
As the industry navigates this transitional period, one thing remains certain: the era of discretionary commission arrangements in motor finance has ended, ushering in a new age of transparency that will reshape dealer-lender relationships for years to come.
