Britain’s Motor Finance Industry Teeters on the Brink
A recent landmark judgment from the UK’s Court of Appeal has sent shockwaves through the motor finance industry, leaving analysts warning of a crisis that could rival the country’s costliest consumer banking scandal.
A Judgment that Changed Everything
The court ruled that car dealers must obtain informed consent from customers before receiving bonuses from banks providing motor finance. This decision caught many off guard and has paved the way for a multi-billion-pound redress scheme to compensate consumers.
A Crisis Unfolds
The UK’s Financial Conduct Authority (FCA) has announced plans to expedite a decision on whether to grant lenders permission to appeal the ruling. The FCA has urged motor finance groups to set aside financial provisions to resolve the high volume of complaints expected in the coming weeks.
Banks Left in Limbo
Niklas Kammer, equity analyst at Morningstar, believes that Britain’s banks have been left in a state of uncertainty since the court ruling. Lloyds is thought to be the most at risk, while Barclays also has some exposure. Kammer notes that the banks followed the rules and guidelines set by the FCA, which are not aligned with the new Court of Appeal ruling.
Uncertainty Reigns
The FCA has stated that it will await the outcome of a potential Supreme Court ruling before taking a decision on the matter. If the ruling stands, the FCA will have to change its rules on disclosures. Worst-case scenarios could see the impact of this crisis rivaling that of the PPI mis-selling scandal, which cost banks over £50 billion.
A Potential £28 Billion Hit
Benjamin Toms, UK banks analyst at RBC Capital Markets, estimates that the downside impact for the motor finance sector could be as much as £28 billion if the Supreme Court upholds the lower court’s verdict. This could lead to some lenders pulling out of the market, resulting in less choice and higher prices for consumers.
Ripple Effects
The FCA is currently reviewing the motor finance industry to probe whether there was widespread misconduct related to discretionary commission arrangements. The agency is considering the impact of the Court of Appeal’s judgment on its review. Other lenders, including Close Brothers Group, Barclays, Investec, Lloyds, and Santander UK, have been significantly involved in motor finance lending and may be affected by the crisis.
Provisions Set Aside
Lloyds, Britain’s largest car finance business, has set aside £450 million in financial provisions. As the situation unfolds, it remains to be seen how this crisis will impact the motor finance industry and the consumers it serves.
Leave a Reply