UK car finance sector in crisis, with banks bracing for mega payouts

Britain’s car finance sector is in disarray, with analysts warning of worst-case scenarios comparable in scale to the country’s most expensive consumer banking scandal.

The unfolding crisis stems from a landmark judgment by the UK Court of Appeal in late October, when the court ruled that it was unlawful for car dealers to receive bonuses from banks providing car finance – without the informed consent of the customer.

The decision has caught many in the car finance industry off guard and appears to have paved the way for a multi-billion pound compensation plan to compensate consumers.

It has led to comparisons with the UK’s payment protection insurance (PPI) scandal. estimated that has cost the banks more than £50 billion ($63.8 billion) and it has considered as the largest misselling scandal in the history of the country’s financial services industry.

The UK Financial Conduct Authority, the country’s financial watchdog, said On Wednesday it will write to the Supreme Court to speed up a decision on whether lenders should give the green light to appeal the ruling.

The FCA, noting that car finance groups are likely to have received a wave of complaints in recent weeks, said it would consider intervening “to share its expertise” if permission to appeal is granted.

It urged auto finance groups to consider setting aside financial provisions to resolve the high number of complaints.

Niklas Kammer, equity analyst at Morningstar, said British banks have been left in limbo since the court ruling. Lloyds is considered to be at greatest risk through its Black Horse activities. Barclays also has some notoriety, Kammer said, “but significantly less.”

“I think it is fair to say that the Court of Appeal ruling came as a surprise to both the banks and the FCA. According to the banks, they were following the FCA rules and guidelines, which are not in line with the new Court of Appeal ruling,” Kammer told CNBC via email.

“As such, there is great uncertainty as to which rules banks must adhere to. The FCA has said that it will await the outcome of a possible Supreme Court ruling before making a decision on this matter,” Kammer said.

“If the ruling stands, the FCA will have to change its rules on disclosures. Initially, the FCA pointed out that the case should not reach the same proportions as the PPI mis-selling, but if the new ruling stands, there will be worst-case scenarios. approximately the same in terms of impact.”

Benjamin Toms, UK banking analyst at RBC Capital Markets, said that if the High Court upholds the lower courts’ ruling, the downside impact on the car finance sector, which includes both banks and non-banks, could be as much as £28 billion.

“Some lenders are likely to withdraw from the market, which will mean less choice and higher prices for those looking to buy a car,” Toms said.

“There is also a chance of legal creep, with other types of loans such as premium financing also coming into the spotlight,” he added.

In January, the FCA launched an investigation into the car finance industry to investigate whether there was widespread misconduct in relation to discretionary commission schemes (DCAs) before they were banned in 2021.

On Wednesday, the company said it is currently examining the impact of the Court of Appeal ruling on its assessment.

Fitch, an influential rating agency, warned earlier this month it had placed Close Brothers Group’s rating at “Rating Watch Negative” due to the lender’s “high exposure” to auto financing.

Other lenders “significantly involved” in car finance include Barclays, Investec, Lloyds and Santander UK, Fitch said.

Lloyds, Britain’s largest car finance company, has set aside £450 million in financial provisions.