In London, United Kingdom, on 6th November 2024, the tower 22 Bishopsgate disappears into mist, with a view towards the Royal Exchange and the City of London. This scene was captured by Mike Kemp | In Pictures | Getty Images.
Analysts are warning of worst-case scenarios in Britain’s motor finance industry, comparing the situation to the country’s costliest consumer banking scandal. The crisis began with a landmark judgement from the U.K.’s Court of Appeal in late October. The ruling declared it unlawful for car dealers to receive bonuses from banks providing motor finance without the customer’s informed consent. This decision caught many in the industry off guard, potentially leading to a multi-billion-pound redress scheme.
The Financial Conduct Authority (FCA) in Britain is seeking to expedite a decision from the Supreme Court regarding the possibility of lenders appealing the ruling. The FCA noted that car financing groups have seen a surge in complaints and suggested that financial provisions be set aside to address the high volume of complaints.
Britain’s banks have been left in limbo since the court ruling on October 25. Lloyds and Barclays are among the banks most at risk, according to equity analyst Niklas Kammer. The uncertainty surrounding the ruling has left banks unsure about which rules to follow, leading to potential significant impacts similar to the PPI mis-selling scandal.
RBC Capital Markets analyst Benjamin Toms believes that if the Supreme Court upholds the lower courts verdict, the motor finance sector could face a downside impact of up to £28 billion. Some lenders may withdraw from the market, resulting in less choice and higher prices for consumers looking to purchase a vehicle.
The FCA is currently reviewing the motor finance industry to investigate potential misconduct related to discretionary commission arrangements before they were banned in 2021. Fitch, a rating agency, has warned of significant risks for motor finance lenders following the Court of Appeal’s judgement. Lloyds, Barclays, Investec, and Santander UK are among the lenders heavily involved in motor finance, with Lloyds setting aside £450 million in financial provisions.