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Car finance companies have been urgently meeting regulators and ministers in a desperate effort to prevent a surprise court decision last Friday leading to a collapse in transactions on the forecourts of Britain.
At least three big car finance firms have temporarily halted extending new credit in the wake of an Appeal Court judgment that went much further than expected in finding lenders liable for failing to disclose commissions.
With the vast majority of new and used car purchases financed by credit, there was “a very real risk that the industry comes to a grinding halt”, said Gary Greenwood, a finance analyst at Shore Capital.
Lenders were “scared to provide credit to customers”, he added. Close Brothers announced on Friday it had paused new business activity, while MotoNovo and Honda Finance Europe were also reported to have temporarily halted car lending.
BMW, Secure Trust Bank, Blue Motor Finance, Zopa and Investec are also understood to have suspended car finance deals, The Times has learnt.
Coming on the eve of a budget intended to boost economic growth, Stephen Haddrill, director-general of the Finance and Leasing Association (FLA), said: “It makes a nonsense of the claim that Britain is becoming a more investible place to do business.”
“I find it absolutely incredible the Court of Appeal made this decision,” he added, saying his counterparts in Europe could not believe what was happening here. Britain’s credit industry was already the most tightly regulated in Europe, Haddrill said.
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About 5,200 new cars are sold every day in Britain, with around four-fifths of them financed through credit arrangements. Many used car deals also require credit.
The FLA has held urgent talks with the Treasury and the Financial Conduct Authority to try to find a solution to the problem that could slow or even paralyse car purchases in the coming days and weeks.
Car purchases were either not taking place at all or had to be conducted with new paperwork to prove that new processes had been followed, said Haddrill, a former chief executive of the Financial Reporting Council.
One reading of the Appeal Court judgment was that credit brokers like car dealers now automatically had to disclose the size of commission payments they received whether asked for the detail or not. They also had to explicitly request and receive borrower consent for the commission to be paid.
Neither of those processes has been routinely followed in the past, nor has it been expected by the City regulator.
Nikhil Rathi, chief executive of the FCA, said on Tuesday night that the industry now needed clarity. “The two lenders in the case intend to appeal and it is in everyone’s interest that when they do, the Supreme Court decides quickly whether it will take the appeal and, if it does, whether it agrees with the Court of Appeal.
“Since the judgment was issued, we have been in close contact with the firms involved, the wider sector and the government to monitor the market, analyse the impact on industry and consumers, and identify what action is required.”
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Haddrill said that the precedent-setting judgment would affect other areas of credit too, including equipment leasing by business. It would also lead to a significant rise in the compensation bill already facing the motor finance sector.
The shock of the Friday ruling continued to rock the car finance industry on Tuesday, with Santander UK postponing its third-quarter results statement to give it time to make a first estimate of its possible liability.
Shares in Lloyds Banking Group fell another 1½p, or 2.8 per cent, to 54½p and have now tumbled by 12 per cent, wiping about £4 billion from its market value, since the judgment on Friday.
Barclays and Close Brothers are other credit providers caught up in the confusion, which has been likened to the slow-burn scandal of payment protection insurance, a mis-selling episode that seemed modest at first but ended up costing the banks about £50 billion.
The FCA investigation centres on whether UK car buyers were improperly treated when they were not told about secret commissions paid by the banks to dealerships offering credit between 2007 and 2021.
Experts said the latest judgment suggested banks might be liable for failings in car finance before 2007. Santander UK, a large high street bank built out of the Abbey National and Alliance & Leicester franchises, is now scrambling to come up with a provision number, taking into account credit deals going back to 2005, when it started in the car finance sector.
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Its division Santander Consumer Finance is thought to be one of the biggest car finance providers in Britain after Lloyds. Last year it extended £2.06 billion of credit to car buyers and recorded £174 million of pre-tax profits. The average loan was £17,300.
Its Spanish parent Grupo Santander pressed on with publishing third-quarter results on Tuesday, while warning that they “do not include the impacts that could potentially derive from the FCA’s review and complaints in the UK related to motor finance commissions, given that it is not possible at this time to reliably predict the financial impact”.
But Jose Garcia Cantera, group chief financial officer, suggested any eventual bill would be significantly less than £500 million: “We are quite sure that this is not going to be material for the group. Materiality is around €600 million, so we expect an impact that is going to be significantly lower than that.”
However, analysts at Royal Bank of Canada said they had estimated a cost to Santander of £1.1 billion and as much as £1.8 billion on a “plausible downside impact” scenario.
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The Court of Appeal verdict was over a case brought by consumers against MotoNovo and Close Brothers. The court concluded that the car dealers, as brokers, owed a fiduciary duty to their customers and that “there was a conflict of interest and no informed consent by the consumer to the receipt of the commission”.
An “expeditious solution” to the crisis was needed urgently, according to a statement put out by S&U, the listed motor finance group.
Santander UK saw mortgage balances and small business loans fall in the third quarter, according to the parent group’s figures, while the number of active UK customers fell by 270,000 to 13.7 million. The UK subsidiary is expected to report within ten days.
Banks braced for impact
Lloyds Banking Group: The biggest car finance firm through its Black Horse division, it was the first to make a firm provision, setting aside £450 million in February. On Monday it clarified that the hit could go higher, describing the Appeal Court judgment as setting “a higher bar for the disclosure of and consent to the existence, nature and quantum of any commission paid than had been understood to be required”. The bank, which has a motor loan book of about £15 billion, was assessing the potential impact and would update investors if necessary.
Estimated hit: £2.5 billion*
Close Brothers: The bank seen as most proportionately exposed has not made any provision yet, though it said last month it had incurred £6.9 million of costs from dealing with the FCA inquiry and customer complaints and expected another £10 million-£15 million of associated expenses next year. Its shares have fallen by 70 per cent since the launch of the FCA inquiry. The bank has cut back lending, scrapped the dividend and put in place asset sales in anticipation of a large bill.
Estimated hit: £250 million*
Barclays: No provision made. Barclays has launched a judicial review challenge against the Financial Ombudsman Service in a related motor finance case where it found in favour of the complainant. Barclays pulled out of motor finance in 2019.
Estimated hit: £350 million*
Investec: The South Africa-based lender made a £30 million provision in respect of its UK car finance operations in April. “The group has to date received a small number of complaints in respect of motor finance commissions and is actively engaging with the Financial Ombudsman Service in its assessment of these complaints,” it said.
FirstRand: South Africa’s largest banking group announced a R3 billion (£129 million) accounting provision in respect of the UK motor finance investigation in September. It has also paid R300 million in legal and other fees over the matter. The credit was provided by its car finance arm MotoNovo, which is appealing against the court decision.
Santander: UK arm delayed results pending calculation of a first provision.
Estimated hit: £1.1 billion*
Bank of Ireland: The chief executive Myles O’Grady described the UK car finance operation as “not material in the context of our overall business model” at the results in September.
Estimated hit: £630 million*
* Estimates from Royal Bank of Canada