Banks warn UK Treasury of risk of sector turmoil after car finance ruling

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Lenders have held urgent talks with the UK Treasury to warn of potential turmoil in the consumer credit sector and call for the financial watchdog to allow more time to deal with customer complaints after a landmark court ruling against car finance commissions.

The meeting on Tuesday between finance bosses, government officials and regulators underlined anxiety in the motor finance industry about a Court of Appeal decision last week, in which senior judges ruled in favour of consumers who complained about “secret” commissions on car loans.

Certain commissions that lenders paid to car dealerships for arranging loans were unlawful, the judges found, prompting lawyers to warn that the industry could face a costly customer redress scheme.

Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), said in a speech on Tuesday evening that the watchdog was considering a request from the sector to broaden its freeze on complaints in order to allow more time to deal with an expected surge following Friday’s court ruling.

The uncertainty sparked by the ruling prompted the Finance and Leasing Association (FLA), which represents many consumer loan companies, to attend an urgent meeting with officials from the Treasury and the FCA.

One person familiar with the talks said FLA representatives warned of the wide-ranging impact of the judgment, which meant large businesses were “effectively” not up to scratch with the law and therefore had to rush to change their systems.

Lawyers said the judgment was an overwhelming defeat for the industry and could leave other areas of finance exposed to legal challenges. It prompted analysts to raise their forecasts of the likely size of compensation faced by car finance companies, which they already estimated could cost the sector as much as £16bn.

Stephen Haddrill, FLA director-general, said after the ruling that it was “significant” and had implications “which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA”.

The ruling could have implications for a range of lending activities involving the payment of hidden commissions by consumer finance providers to brokers, according to the trade body and legal experts.

It prompted FTSE 250 lender Close Brothers to pause all motor finance lending. The bank, which has the highest relative exposure to car finance of any lender, has already lost more than half its market value since regulators first announced in January they were investigating the sector.

Lloyds Banking Group, which owns Black Horse, Britain’s largest car finance business, said the ruling set “a higher bar” for the disclosure of and consent to commissions than had been “understood to be required or applied across the motor finance industry prior to the decision”.

The FTSE 100 company said it was “assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications”. And Spanish bank Santander delayed publication of its full UK results as it sought to quantify the impact of Friday’s judgment.

In addition to Close Brothers, the ruling sided with consumers against FirstRand. The South African lender said the decision had “far-reaching and materially negative implications for the motor finance industry and broader consumer finance sectors in the UK”.

The FCA opened a probe into potential mis-selling of car finance this year and will update the market on its next steps in May.

The watchdog is specifically probing “discretionary commissions”, in which the money earned by a car finance broker increases as the rate on a customer’s loan rises. But Friday’s ruling opens the door to other forms of car finance being illegal.

The FCA has frozen complaints on discretionary commissions until December, but Rathi said on Tuesday the industry was asking it to expand this to cover customers seeking redress on other types of car finance.

“We are considering this carefully and working at pace through the potential benefits and risks of doing so,” he said, adding: “We understand industry’s desire for time to take stock.”

Lawyers and analysts have said Friday’s ruling makes it more likely the watchdog will implement a costly redress scheme for lenders, mirroring remediation imposed over the payment protection insurance (PPI) scandal that ended up costing the banking sector almost £50bn.

Barclays is appealing against a ruling by the Financial Ombudsman Service, which handles complaints made by consumers against financial services companies, that granted a customer redress for car financing provided by the bank. Close Brothers and First Rand have both said they will appeal against Friday’s judgment.

The FLA and the Treasury did not immediately respond to requests for comment.

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