Motor finance: Where do the banks, regulator and Treasury stand?
The UK banking sector had hoped the Supreme Court’s motor finance ruling would finally switch off the hazard lights and allow lenders to return to business as usual.
The industry was handed a lukewarm win by the highest court in the land, who ruled in favour of the banks on two out of three cases.
The move helped overturn the Court of Appeal’s October 2024 ruling that found it unlawful for banks to pay commissions to car dealers without obtaining the customer’s informed consent.
But the top Court found in the case of Johnson, the claimant’s outsized commission of 55 per cent was “unfair” and therefore they were entitled to compensation.
Johnson’s victory opened the door for the Financial Conduct Authority (FCA) to consult on an industry-wide redress scheme where the watchdog has deemed the high threshold as 35 per cent.
Banks are expected to be hit with an £11bn bill – still a hefty sum but far below the £44bn once feared by the City.
Around 14.2m agreements will be eligible for the scheme, dating back to 2007.
But the framework has faced backlash from the sector, which claims the regulator has misinterpreted the Court’s ruling with a scheme that will fail to provide proportionate redress.
Santander calls for the government to step in
Santander UK skipped its third quarter results on October 29 after warning of “uncertainty” in the FCA’s redress scheme.
Spain’s biggest lender took aim at the City watchdog as it warned of “potential implications” due to the redress scheme differs in “important respects from the Supreme Court’s ruling”.
The bank has set aside £295m for the scandal, though RBC analyst Benjamin Toms anticipated “based on peers provisioning levels… the bank needed to take an incremental provision of around £500m.”
Earlier this year, reports suggested Santander was to spin off its litigation-hit motor finance division as part of a major overhaul of its UK operations.
The bank’s UK chief Mike Regnier has said “material changes” to the proposed redress scheme should be an “active consideration for the UK government”.
“Without such change, the unintended consequences for the car finance market, the supply of credit and the resulting negative impact on the automotive industry and its supply chain could significantly impact jobs, growth and the broader UK economy.”
Lloyds warns of two-decade profit hit
Lloyds Banking Group has raced ahead of the pack for highest provisions at £2bn after the firm set aside an additional £800m in early October.
The group owns the nation’s largest motor finance lender, Black Horse, and is the most exposed to the scandal of all high street banks.
Charlie Nunn, the bank’s chief executive, has claimed: “When you look at the implication of what’s been proposed by the FCA, it’s going to potentially take 20 years of profitability off the car finance industry.”
As the bank hiked provisions it raised concerns that the scheme was not proportional or reasonable in ensuring customers were rightly compensated and it did not reflect the “actual loss” of borrowers.
William Chalmers, the bank’s finance boss, refused to rule out a legal challenge when pressed whether the lender would take the FCA to court should the final redress not fall within its preferred scope.
Lloyds reported a third-quarter pre-tax profit of £1.2bn – a 36 per cent drop following the increase in provisions.
AJ Bell investment director Russ Mould said: “The car finance scandal may have sent profit into reverse but there was enough underlying good news from Lloyds to keep the share price ticking over.
Close Brothers joins FCA pile on
FTSE 250 lender Close Brothers said it would hike provisions shortly after the FCA provided fresh details on the redress.
The bank near-doubled provisions to £300m with an accompanying statement that echoed frustrations from Lloyds.
“The group does not believe the redress methodology proposed by the FCA appropriately reflects actual customer loss or achieves a proportionate outcome,” the firm told markets in October.
Close Brothers took centre stage in the Supreme Court legal battle where Judges sided with the lender.
The group faces deep exposure to the market, which in its half-year report made up around 20 per cent of its loan book.
Analysts at Moody’s said the bank had “mitigated the impact on its capitalisation” through suspending dividends, selling its asset management business, reducing loan growth and cutting costs.
The bank has offloaded a series of business arms over the last year including its brewery arm and broker Winterflood.
Barclays near-quadruples provisions
FTSE 100 giant Barclays has operated in the motor finance market under Clydesdale Financial Services from 2003 to 2019.
The bank originally set aside £90m in provisions but added an extra £235m in October.
Barclays joined the chorus of critics in warning the conditions did not “accurately address actual loss suffered by customers and do not achieve a proportionate or appropriate outcome”.
Still, the firm laid out plans in its third-quarter results to shift to a quarterly buyback and deliver £10bn to shareholders by 2026.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said the fresh motor finance charge “grabbed attention” but investors had “priced in” the impact.
Shares in the lender were up over 2.6 per cent to 373.95p. as markets opened on Wednesday.
FCA sticks to its lane
Despite the backlash, the City watchdog has doubled down on its position.
The regulator has said: “Many motor finance lenders did not comply with the law or the rules. It’s time their customers get fair compensation.”
It added the court judgments indicate “liabilities exist no matter what” and that its scheme was the “best way to settle the issue for both consumers and firms”.
In a Treasury Committee hearing, FCA boss Nikhil Rathi said there had been a “range of co-operation” across lenders and claim management companies.
Despite being pressed to name uncooperative firms, Rathi said: “I think you can see firms in the public domain that have raised questions about any redress scheme we put in place”.
Rathi has also previously urged firms not to “haggle with us but to help put things right for consumers”.
Specialist lenders and automakers raise alarm
Secure Trust Bank has more than tripled its motor finance cash and the Bank of Ireland doubled its provision to £350m.
Earlier this year, Secure Trust laid out plans to exit its vehicle finance lending as part of a bid to boost returns.
Ford and BMW have also been caught up in the motor finance storm with each forced to set aside funds for a potential hit.
BMW’s UK car finance arm has set aside over £200m whilst Ford is on the hook for £61m.
Executives have lobbied for a meeting with Chancellor Rachel Reeves over fears regarding the regulator’s redress scheme according to The Times.
Rachel Reeves kicked to passenger seat
Chancellor Rachel Reeves had hoped to take the wheel in the saga to curb a major hit to the banking sector but faced a roadblock from the UK’s top court.
The Supreme Court rejected the Treasury’s application to intervene in April’s hearing – a move that sent banking stocks across the board tumbling.
The attempt from the Treasury followed government concern that resulting fines could trigger a withdrawal of companies from the sector and prevent customers accessing credit to buy cars.
Ahead of the ruling, which was announced August 1, Reeves was reported to be considering overruling the final verdict if the top Court was to side against lenders, according to The Guardian.
Analysts floated figures from £30bn to an eye-watering £44bn as the City braced for what could have been a devastating hit to the market.