Major Lender Santander UK Sees Profits Tumble 38% Amid Car Finance Mis-Selling Fallout

Santander UK's pre-tax earnings for 2024 have decreased 38% to £1.3 billion, owing mostly to the ongoing auto financing mis-selling scandal, stiffer rules, and a more competitive lending market. The UK branch of the Spanish banking group was the only major Santander market to experience a drop in profits. Total revenues fell by 10% to £4.7 billion, and net interest income decreased by 7% to £4.3 billion. Experts believe this is a result of increasing competition for deposits, a slowdown in mortgage growth, and importantly, the bank's large set-asides for possible compensation claims.

Mounting Costs from Car Finance Mis-Selling

Santander UK is facing problems due to issues with car finance mis-selling. This scandal has also affected other well-known lenders such as Lloyds, Barclays, and Close Brothers. In October, the Court of Appeal decided that car dealers may have broken common law fiduciary duties by not revealing commissions they received. This ruling stretches far beyond the Financial Conduct Authority’s (FCA) previous focus on discretionary commission arrangements (DCAs), sweeping in virtually any “secret” fee arrangement.

The recent court decision has widened the net of mis-selling claims, targeting virtually any undisclosed commission deal. That means thousands—possibly millions—of customers could be eligible for compensation. Previously, the FCA’s focus was on discretionary commission arrangements. Now, any undisclosed commission deal could be grounds for compensation, including Santander mis-sold PCP agreements and similar cases at other major lenders.

Santander has allocated £295 million for potential payouts for Santander finance claims. Experts anticipate that the overall impact on the sector may reach an astonishing £30–£44 billion, significantly surpassing previous projections of £13–£16 billion. Some analysts caution that it may pose a threat comparable to the Payment Protection Insurance (PPI) crisis, which resulted in nearly £50 billion in losses for the UK banking sector over a span of more than ten years.

Leading financial institutions such as Lloyds and Barclays appear to have the requisite resources to navigate the impending challenges successfully. Major financial institutions, such as Santander UK, are facing considerable obstacles in the upcoming period. Profitability is under pressure due to regulatory ring-fencing rules, increasing interest rates, and intense competition for deposits. Combine these with the potential liabilities of car finance mis-selling, and the pressure is on Santander UK to shore up its books—and fast.

Balancing the Bottom Line

The bank is facing challenges in a slower mortgage market. Mortgage lending fell by 5% to £167.2 billion. This decline shows that higher rates and cost-of-living worries have made it harder for people to buy homes. Customer deposits fell by 5% to £183.4 billion as consumers and businesses sought better savings rates elsewhere.

Santander UK attempted to improve its deposit offerings at the beginning of 2024. Later, management decided to pull back to protect profits. This left them in a tricky situation: they needed to keep depositors satisfied while also maintaining their earnings. There are positive aspects to consider:

1. Fourth-Quarter Upswing - Fourth-quarter pre-tax profits surged to £383 million, up from £143 million in the prior quarter.
2. Net Interest Margin Gains - The bank's net interest margin increased from 2.17% to 2.25%, indicating a little improvement in lending and deposit spreads.

Chief Executive Mike Regnier commended the "sense of momentum" but cautioned that 2025 might suffer from economic uncertainties.

Forecasts Regarding Santander's Future in the UK

Concerns are growing about Santander's dedication to the UK market as revenues continue to decline. Executive Chair Ana Botín expressed her affection for the UK, stating, "We love the UK." However, analysts caution that a sale might still be possible if an attractive offer arises. Speculation intensified after UK Chairman William Vereker announced his resignation. Recent developments have brought to light growing worries about the possible underlying tensions linked to the regulatory landscape, as well as discontent with the limitations set by ring-fencing. Some people are talking about a possible Barclays takeover, although this is still simply rumour.

A Santander UK exit would disrupt the market. During the 2000s, the bank bought Abbey National, Alliance & Leicester, and Bradford & Bingley. The decision built a substantial presence on the high street, with over 400 locations serving 14 million people throughout the UK.

Ongoing Job Cuts and Cost-Saving Measures

Facing significant compensation costs, Santander UK is tightening its financial controls. In recent years, the bank cut 1,400 jobs and, in 2024, quietly dismissed another 1,800 staff. The UK workforce now numbers around 18,000. Bank leaders talk up “simplification and automation” initiatives through 2025—code for more branch closures or staff reductions, especially as customers embrace online services. Nothing’s guaranteed yet, but given the pressure to rein in costs, it’s likely the headcount will shrink further.

FCA’s Work: Setting the Rules

The FCA has long kept an eye on the motor finance sector for signs of misleading charges—particularly around undisclosed commissions that might lead to inflated interest rates. This has a direct bearing on Santander car finance mis-selling claims and any redress due to affected borrowers.

1. March 2019 Findings - The regulator's final investigation indicated that some compensation structures incentivised brokers to raise interest rates, causing clients to overpay.
2. July 2020 Ban on Discretionary Commission - Following a consultation, the FCA outlawed certain commission arrangements effective January 2021, putting an end to the practice of raising interest rates to pad broker remuneration.
3. January 2024 Investigation into Past Commission Arrangements - As more complaints poured in—particularly about Santander finance claims—the FCA launched a deeper dive into deals made between April 2007 and January 2021.
4. Temporary Hold on Complaints - The watchdog has declared that the usual eight-week period for lenders to respond to complaints pertaining to commissions will be temporarily suspended. In order to guarantee consistent results, this measure will be in place until September 2024.
5. Extension until December 2025 - Citing challenges in gathering data from lenders as the cause of the schedule's postponement, the FCA has announced an extension to December 2025.

Another PPI? Or an Even Bigger Scandal?

At first, the FCA sounded almost hopeful that car finance mis-selling wouldn’t balloon into another PPI fiasco. But the latest Court of Appeal decision expanded the scope beyond just discretionary commission models, encompassing just about any undisclosed fee arrangement labeled “secret.” That leaves the door wide open for thousands—or millions—of potential claims.

The industry is left wondering if we’re on the cusp of a scandal as big, or bigger, than PPI. Stephen Braviner Roman, the FCA’s general counsel, admitted at a Treasury committee hearing that he once believed the problem might be contained. But given the new ruling, he says it’s now “premature” to assume the total price tag will be smaller than PPI’s.

PPI stretched back to the 1970s. Here, the alleged mis-selling primarily dates from 2007 onward—yet the financial costs could still be colossal, particularly if the Supreme Court stands by the Court of Appeal’s judgment, compelling lenders to return the commissions plus interest and potentially more in damages.

Political Pressure and the Chancellor’s Role

With a potential multi billion-pound consumer settlement looming, top government officials are understandably nervous. Chancellor Rachel Reeves has expressed fear that a massive mis-selling bill may stymie banks' capacity to provide new loans and assist the economy. She’s encouraging regulators to balance consumer protection (i.e., paying victims back) with financial stability (i.e., not sinking lenders in the process).

Reeves has also pushed the Supreme Court to make a speedy call on whether to grant lenders—like Close Brothers and FirstRand—the right to appeal the Court of Appeal’s ruling. Should Britain’s highest court uphold the broader definition of “secret” commissions, the banking sector could be in for a deluge of claims. That might prompt some lenders to retreat from certain product lines or tighten credit criteria, stunting economic growth just when the UK needs it most.

Operational Outlook

Santander UK insists it’s not bailing from Britain any time soon. Ana Botín maintains the UK remains a core market, noting its relative economic stability and the diversification it brings to the broader Santander group. But the bank’s immediate goal is to slash overhead in case mis-selling claims snowball.

If interest rates fall to around 3.75% by late 2025, as some experts suggest, mortgage activity could increase, benefiting Santander’s margins. Obstacles such as ongoing inflation, competition for deposits, and new geopolitical conflicts may hinder any recovery in the near future.

Mike Regnier emphasises that the bank’s ultimate liability hinges on several moving parts—legal judgments, the volume of complaints, and the broader economic picture. In the meantime, borrowers are combing through their old finance deals to see if they have a case, while lenders brace for whatever curveballs regulators and courts might throw at them next.

Looking Ahead

There may be a major event that could cause Santander UK to see a drop in profits over time. This situation might also bring back discussions about a potential exit strategy. If the courts reduce liability or make exceptions, Santander might handle the challenges better. The company may achieve this by reducing expenses, cutting operating costs, and focussing on profitable products.

More borrowers are filing complaints to recover unfair costs. The FCA is working to make sure banks respond consistently and fairly. Consumers have an opportunity to reclaim money they might have overpaid. The industry is working quickly to control a potentially large scandal before it causes lasting harm.