As lenders face a deluge of compensation claims over a car finance scandal, Lars Mucklejohn questions whether the sector is heading for a disaster on the scale of PPI.

Car finance providers are scrambling to avoid a complete market collapse after a London court ruling on “secret” car loan fees caused chaos around the world. the sector this week.

A Court of Appeal ruling last Friday forced some major lenders to suspend new business, restructure their systems and push for urgent talks with the government.

The judges ruled that a runner could not legally receive a commission from the lender without obtaining the client’s fully informed consent for payment.

The decision has made it more likely that the Financial Conduct Authority (FCA) will implement a compensation scheme for lenders as part of its review of the so-called discretionary commission agreements (DCA), potentially exposing banks to billions in additional compensation costs.

Lloyds Banking Group has abolished commission payments on new loans at its car finance division, Black Horse, the UK’s largest car lender.

William Chalmers, the group’s chief financial officer, held an urgent call with analysts and investors on Tuesday to explain his reaction to the court ruling. AM City understand.

He did not provide details on whether Lloyds would make additional provisions beyond the £450m he set aside in February to cover potential costs.

However, Chalmers said that the variables that will enter the bank provisioning model They are now broader than when I was just trying to estimate the impact of the FCA review.

Lloyds’ share price has fallen 14 per cent since the ruling. RBC Capital Markets estimates that Lloyds could take a £3.9bn hit to profits at worst.

Close Brothers, considered the bank most exposed to the FCA investigation in relative terms, made plans to strengthen its finances by £400 million earlier this year and since then sold his patrimonial arm for 200 million pounds.

But things have gone from bad to worse for the 146-year-old merchant bank.

Close Brothers, which was involved in last week’s test case, has suspended new car loans since the ruling. Its share price, which had already been hit earlier this year, has plummeted 37 percent since last Friday and is now trading at a price minimum of three decades.

RBC has modeled a worst-case scenario, in which Close Brothers would take a hit of £387m in compensation, interest and administrative costs. That figure is larger than the company’s current market capitalization of £343m.

Elsewhere, Santander United Kingdom has delayed the release of its full third-quarter results to digest the ruling. RBC estimates a negative impact of £1.8 billion.

The departures are coming

A number of smaller car lenders have also suspended lending, including Zopa, Secure Trust Bank, MotoNovo, Mann Island, V12 and Northridge.

Analysts have warned that the fallout could drive some firms out of the sector altogether, as judges have effectively overturned previous FCA guidance.

“Banks will quickly adapt their contracts and processes to comply with the new rules,” said RBC analyst Benjamin Toms. AM City.

“However, in the medium term, some lenders will decide that lending in this sector is no longer for them.”

Several of the companies that have suspended their loans, such as Secure trusthad said in the months before the ruling that they were not significantly exposed to the FCA investigation.

An auto lender executive said AM City They had previously doubted analyst estimates that banks could be forced to receive billions in compensation, given that the FCA has estimated DCAs passed on £165m in extra charges to consumers each year.

The FCA investigation focuses on DCAs between 2007 and 2021, when were banned. The agreements were standard in the industry and were included in about three-quarters of auto loans during the period.

The banking sector in general has been flooded with historical complaints while consumers seek compensation and claims management companies take advantage of the situation.

Just four months after the FCA announced its investigation, the Financial Ombudsman Service – which resolves disputes between consumers and financial services companies – received 20,000 complaints about car finance.

An executive at an auto finance provider said AM City That when MoneySavingExpert.com founder Martin Lewis listed his bank on television earlier this year as one that had never used DCA, the company still received more than 2,000 complaints.

Ministers quarrel

On Tuesday, Treasury ministers held urgent talks with FCA officials and representatives of the Finance and Leasing Association (FLA), which represents car lenders, to discuss the ruling.

The FLA is now urging the regulator to extend its pause on the eight-week window firms have to respond to DCA complaints, currently in place until December 2025. FCA boss Nikhil Rathi said in a tuesday speech that the regulator would consider taking this step.

A Treasury spokesman said AM City: “The Treasury is working closely with regulators and the industry to understand the impact of this ruling.”

The judges ruled that lenders must inform customers of all payments to dealers, that is, not only bonuses but also fixed fees. The precedent set by the decision could even go beyond auto loans and apply to a range of consumer finance fees, lawyers say.

Toms said: “Three examples of the many questions that have been left open include: Does this decision extend beyond engine financing? What years are now in scope? And should all commissions paid be returned to clients?

The FCA was originally due to set out its next steps in the review in September, before delaying it until May 2025 in July. But given last week’s ruling, analysts now expect it to take even longer.

That is partly because close brothers and South African bank First Rand have said they will appeal last week’s ruling to the Supreme Court.

The court is expected to fast-track the appeal given its commercial sensitivity, but it is seen as unlikely to reach a conclusion soon enough for the FCA to incorporate it in its update in May. It is also unlikely that banks will be able to fully measure the potential impacts before announcing annual results in February.

Instead, RBC hopes the regulator will delay its announcement until the summer. The FCA did not respond to a request for comment.

great business

A freeze of the car finance industry could shake up the UK economy by clogging up the car market and dragging down sales.

Lenders issued £16.9bn in car loans last year, and it is estimated that between 80 and 90 per cent of new vehicles were bought with finance.

“Ultimately, this will lead to less supply of car finance products, which will inevitably result in a higher cost of car finance for the customer,” Toms said.

TO repair scheme could become the UK’s biggest banking sector since the infamous Payment Protection Insurance (PPI) scandal, which saw banks hand back more than £38bn between 2011 and 2019 for mis-sold insurance policies.

Analyst estimates for the banks’ combined exposure have peaked at around £16bn so far. This figure does not include the finance divisions of the car companies themselves, which make the majority of car loans in the UK.

Honda and BMW suspended sales to customers after the ruling and have since resumed deliveries.