Car finance lender quits market after commissions scandal sparks industry upheaval
A watershed Court of Appeal ruling last October declared that lenders could not hand car dealers commissions without a customer's informed consent.
Until 2021, most vehicle purchases involved the use of discretionary commission arrangements, which enabled dealerships and brokers to set the interest rate on a buyer's finance agreement.
This incentivised brokers to charge consumers higher rates, regardless of other factors, such as the loan's value, length of agreement, or a customer's credit score.
The Court of Appeal's decision has left the vehicle finance industry worried it might be hit with a huge compensation bill.
Ratings agency suggests the sector could end up paying £30billion, while one senior Financial Conduct Authority lawyer estimates it could surpass the £50billion banks paid to settle PPI claims.
Following an appeal against the October court decision, the Supreme Court is set to bring a final judgement on the matter sometime this month.
Secure Trust told investors on Wednesday its commercial banking firm is halting all lending within the motor finance segment and allowing the existing portfolio to run off.
It claimed the move 'reflects the historical financial performance and medium-term outlook' of the vehicle finance division, which incurred a £21.8million loss before tax and exceptional items last year.
STB believes the pivot would have increased its adjusted pre-tax profits in 2024 from £39.1million to £56.6million and its return on average equity by 800 basis points.
The Solihull-based company hopes to eliminate over £25million of operating costs by 2030 from running down its motor finance loan book.
Over the same timeframe, 284 positions will be at risk of redundancy, including 78 this year alone.
The lender intends to redirect capital to more 'higher-returning' businesses, including retail finance, commercial finance, and real estate finance.
David McCreadie, chief executive of STB, said the 'pivot will allow the group to prioritise these established specialist businesses and achieves further simplification of the group, combined with the removal of a significant level of costs.
'These measures will have a material positive impact on ROAE for the group and will position the group to being capital accretive.'
'We will be consulting with impacted colleagues to explain why this pivot in our strategy will drive the future sustainable success of the group.'
Secure Trust Bank shares were 6.8 per cent up at 852p on Wednesday morning and have climbed by around 140 per cent since the year started.
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