The UK’s auto finance sector is in turmoil, with experts cautioning that the worst-case scenarios could rival the country’s most expensive consumer banking scandal. This escalating crisis can be traced back to a pivotal ruling by the UK’s Court of Appeal in October. The court deemed it illegal for car dealers to accept bonuses from banks providing auto finance without securing the customer’s informed consent.
This unanticipated ruling has left many in the auto finance industry stunned, opening the door for a substantial redress scheme to reimburse consumers. It has invited comparisons with the UK’s infamous payment protection insurance (PPI) scandal, which reportedly cost banks over £50 billion ($63.8 billion), marking it as the largest mis-selling scandal in the country’s financial history.
The UK’s Financial Conduct Authority (FCA), the national financial regulator, announced on Wednesday its intention to petition the Supreme Court for an expedited decision on whether to allow lenders to appeal the ruling. The FCA, acknowledging a possible spike in recent complaints against car financing firms, said it might intervene to share its expertise if the permission to appeal is granted.
The FCA urged auto finance companies to consider establishing financial provisions to address the surge in complaints. Niklas Kammer, an equity analyst at Morningstar, stated that the October ruling has left UK banks in a state of uncertainty, with Lloyds Bank potentially being the most vulnerable through its Black Horse business. Barclays Bank also has some exposure, albeit significantly less, according to Kammer.
Kammer expressed surprise at the Court of Appeal ruling, which seemingly caught both banks and the FCA off guard. Despite the banks’ adherence to FCA rules and guidelines, these are now at odds with the new court ruling. This discrepancy has created a significant uncertainty about the rules banks must follow. Kammer noted that the FCA is awaiting the outcome of a potential Supreme Court ruling before deciding on its next steps. If the ruling is upheld, the FCA will have to amend its disclosure rules. While the FCA initially suggested the issue would not reach the scale of the PPI scandal, Kammer warned that if the new ruling stands, the worst-case scenarios could be comparable in magnitude.
Benjamin Toms, a UK banks analyst at RBC Capital Markets, predicted that if the Supreme Court upholds the lower court’s verdict, the auto finance sector, encompassing both banks and non-banks, could face a downside impact of as much as £28 billion. Toms warned of potential market withdrawal by some lenders, resulting in less choice and higher prices for prospective car buyers. He also highlighted the potential for other types of lending, like premium finance, to come under scrutiny.
In January, the FCA launched a review into the auto finance industry to investigate potential widespread misconduct related to discretionary commission arrangements (DCAs) before their ban in 2021. The FCA is currently assessing the impact of the Court of Appeal’s judgement on its review. Rating agency Fitch warned that it had put the ratings of Close Brothers Group on “Rating Watch Negative” due to the lender’s high exposure to auto finance. Other lenders significantly involved in auto finance lending include Barclays, Investec, Lloyds, and Santander UK. Lloyds, the UK’s largest car finance business, has already set aside £450 million in financial provisions.
