UK car finance industry in crisis as banks prepare for huge payouts

On November 6, 2024, London, England, looking at the Royal Exchange and the City of London, the glass building of No. 22 Bishopsgate Tower disappeared in the mist.

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Britain’s car finance industry is in turmoil, with analysts warning the worst-case scenario could mirror the country’s costliest consumer banking scandal.

The fast-moving crisis stems from a landmark judgment by the UK Court of Appeal in late October, when it ruled that car dealers were guilty of receiving bonuses from banks that provided car finance without the informed consent of their customers. illegal.

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

Comparisons have been drawn to the UK’s Payment Protection Insurance (PPI) scandal. estimated Bank losses exceed 50 billion pounds ($63.8 billion) regarded as It was the largest mis-selling scandal in the country’s financial services history.

The Financial Conduct Authority, the country’s financial regulator, explain On Wednesday, it will write to the Supreme Court to expedite a decision on whether lenders will be allowed to appeal the ruling.

Banks in “difficulty”

The FCA noted that car finance groups may have received a high number of complaints in recent weeks and said it would consider intervening “to share its expertise” if the appeal is allowed.

It urged car finance groups to consider allocating financial allocations to address the high number of complaints.

Morningstar equity analyst Niklas Kammer said UK banks have been in “difficulty” since the Oct. 25 court ruling, Lloyds Bank It is believed that its dark horse business faces the greatest risk. barclays bank Kammer said there was some exposure, “but not much.”

A bank branch of Lloyds Banking Group in London, England, on Monday, October 21, 2024.

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“I think it’s fair to say that the Court of Appeal’s decision came as a surprise to the banks and the FCA. According to the banks, they followed the rules and guidelines set out by the FCA and those rules and guidelines were inconsistent with the FCA’s new ruling,” Kamer said. told CNBC via email.

“There is therefore considerable uncertainty as to which set of rules banks must comply with. The FCA has said it will await the outcome of a potential Supreme Court ruling before making a decision on the matter,” Kamer said.

“If the ruling stands, the FCA will have to change its disclosure rules. Initially, the FCA stated that the matter should not have a similar proportion to PPI mis-selling, but if the new ruling stands, the worst-case scenario does have an impact close to the same level. “

Lenders ‘likely to exit the market’

Benjamin Thomas, UK banking analyst at RBC Capital Markets, said if the Supreme Court upholds the lower court’s decision, the negative impact on the auto finance industry, including banks and non-banks, could be as high as 28 billion pounds.

“Some lenders may exit the market, meaning there will be fewer options and higher prices for those looking to purchase a vehicle,” Toms said.

He added: “There is also the potential for legal contagion, with other types of lending such as prime financing also coming under scrutiny.”

London taxis queue at the taxi rank outside Fenchurch Street station on October 14, 2024 in London, England.

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In January this year, the FCA launched a review into the car finance industry to investigate whether there was widespread misconduct ahead of a ban on discretionary commission arrangements (DCA) in 2021.

It said on Wednesday it was now considering the impact of the Court of Appeal decision on its review.

Fitch is an influential rating agency. warn Earlier this month, the bank had placed Close Brothers Group’s ratings on “Rating Watch Negative” due to the bank’s “high exposure” to the auto finance sector.