Lenders in car finance scandal brace for judgment from investors
Close Brothers, Lloyds Bank, Barclays and the controlling group of Santander UK, among Britain's largest providers of motor finance, could see an impact on their share prices as investors consider the consequences of the Financial Conduct Authority announcing plans for a potential compensation scheme that could distribute payments as soon as next year.
The FCA said on Sunday that a redress scheme could cost between £9 billion and £18 billion and should cover car loans dating back to 2007. Individuals could receive payments of almost £950 each.
The announcement from the City watchdog came after the Supreme Court overruled key elements of an earlier judgment from the Court of Appeal in October that could have put the motor finance industry on the line for compensation payments of more than £30 billion, similar in scale to the £50 billion of payouts under the payment protection insurance scandal of the 2010s.
Following that October ruling, shares in Close Brothers, one of the largest players in Britain's motor finance market, slumped by about a quarter in just one day. Shares in Lloyds Bank, which is exposed via its Black Horse lending arm, tumbled by more than 7 per cent.
RBC Capital Markets predicted a 'sector impact' of £11.5 billion, with banks paying £3.8 billion and non-banks paying £7.7 billion.
Banks had already set aside billions of pounds for possible compensation payments for people who bought a vehicle from a dealership that failed to properly disclose commissions they received from lenders. Lloyds Banking Group alone reserved £1.2 billion. However, analysts at the investment bank Jefferies predicted that the regulator's plans 'largely de-risk Lloyds' shares' from the scandal and that the redress scheme 'is consistent with our long-held assumptions'.
Carmakers will also be in focus as many have their own in-house credit divisions. In the wake of the October Court of Appeal ruling, Honda and BMW stopped offering new loans to customers.
Alex Neill, co-founder of the rights group Consumer Voice, said: 'Millions of drivers placed their trust in car dealers to secure a fair deal, yet were kept in the dark about unfair commissions that inflated the cost of borrowing. Now, for the first time there is a clear path to justice.'
Slater and Gordon, a law firm, said: 'While the [Supreme] Court effectively sided with lenders in two of the three cases, the judgment does not close the door on compensation.'
However, it said it was 'concerned that aspects of any proposed redress scheme may inadvertently exclude a significant number of those affected'.
Adrian Dally, director of motor finance at the Finance & Leasing Association, an industry body, said: 'We have concerns about whether it is possible to have a fair redress scheme that goes back to 2007 when firms have not been required to hold such dated information, and the evidence base will be patchy at best.'
The FCA shocked the motor finance industry in January last year when it announced it would examine so-called discretionary commissions paid to dealers between April 2007 and January 2021, when these types of payments were banned.
Under such discretionary commission arrangements, brokers were allowed to set the interest rate on loans extended to borrowers. If they charged a higher rate, they would receive larger commissions, so they were motivated to do so at the expense of consumers' finances.
Concerns within the motor finance market then amplified in October when the Court of Appeal decided that car dealers, in their capacity as credit brokers, had a fiduciary duty to their customers, meaning that they should act in consumers' best interests. It also said that undisclosed commissions amounted to bribes. Key elements of this judgment were overturned by the Supreme Court last Friday.
There were about 25.9 million motor finance deals arranged between 2007 and the end of 2020, although the Supreme Court ruling means many will be ineligible for redress.
There had been fears in the government that lenders would face a deluge of compensation claims, leading to the car finance market seizing up. The Treasury had been considering whether to step in to protect lenders.
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