UK banks could face major losses over FCA motor finance review
UK banks could be on the hook for billions in compensation, according to analysts, after the City watchdog announced a review into unfair costs on discretionary car finance commissions.
Analysts at investment bank RBC estimated a downside impact of between some £2bn and £8bn for the motor finance sector.
They said the review could hit Lloyds Bank’s pretax profit by some £270m to £1.2bn, the largest absolute impact of banks in their coverage.
Analysts at Barclays also estimated a potential provision range for Lloyds of between £0.5bn and £1bn but said uncertainty was “high”.
Lloyds shares fell as much as 2.5 per cent this morning. Bank of America cut its rating on the stock due to the lender’s high exposure.
The Financial Conduct Authority (FCA) last week announced it would “review historical motor finance commission arrangements and sales across several firms” and ensure consumers receive an “appropriate settlement” if it finds evidence of widespread misconduct.
The FCA in 2021 banned certain commission models for car finance which encouraged brokers to raise costs for consumers.
However, several complaints have been made about commission arrangements put in place before the ban.
RBC added that Barclays could see a £30 to £150m profit hit, while merchant banking group Close Brothers could lose £20m to £120m. The latter firm’s shares fell as much as 3.6 per cent on Monday.
Close Brothers clocked £2bn in motor loans as of the third quarter, making up around 20 per cent of its loan book. RBC noted that the firm’s typical customer was “below prime”.
Lloyds had £15.3bn in motor loans as of the third quarter – three per cent of its loan book.
“We expect the review to drive increased provisions at banks, including admin costs,” said analysts at UBS. “We would be surprised if the FCA review is completed much before the end of 2024.”
They added that costs to banks depended on factors including how far back the review goes, the proportion of loans made via brokers and dealers, and whether the FCA rules that all affected customers be refunded.
In response to the FCA’s announcement, Martin Lewis last week posted on Twitter/X: “I’ve done back of the envelope numbers and at the top end this could be PPI-type scale (that was £40 billion)”.
RBC analysts said the post was “at best unhelpful”. They argued that banks are “relatively under-penetrated in the market” and had not benefited from discretionary commissions.
The broker also flagged possible implications for the financing of insurance premiums after the FCA’s insurance chief said last week it was a “poor product” and a “poverty premium”.
The FCA will set out the next steps of its review in the third quarter of this year.