A worsening car finance crisis could deal a major blow to Britain’s economic prospects, according to the head of the country’s largest retail bank.
Charlie Nunn, chief executive of Lloyds Bank, warned that uncertainty caused by the latest court rulings was undermining investor confidence and risking a multi-billion-pound claims storm reminiscent of the PPI scandal.
Mr Noon’s concerns follow a landmark Court of Appeal ruling that deemed hidden commissions paid by banks to car sellers illegal. The ruling, handed down last month, has effectively overturned a long-standing industry practice and appears to contravene guidance previously issued by the Financial Conduct Authority (FCA). The court’s ruling that sales staff had a “fiduciary duty” to secure the best deal for consumers raised the possibility that similar claims would spread beyond auto financing into other areas of consumer lending.
Speaking at an event hosted by the Financial Times, Nunn said: “Investors look at this and say that the courts’ principle of making decisions independently of regulation… is bleeding throughout the economy.” He noted that the uncertainty caused by the ruling, coupled with regulatory hesitation, is making it difficult for both foreign and domestic investors to allocate funds to UK financial services and the wider economy.
The repercussions are expected to be costly. Industry observers have likened the situation to the Payment Protection Insurance (PPI) scandal, which brought tens of billions of pounds in damages to UK lenders. Initial estimates suggest car finance payouts could reach £16bn, with some claims management companies warning of potential payouts of up to £40bn.
The crisis has already begun to worsen. Lloyd’s, which entered the market through its Blackhorse subsidiary, took a £450m provision earlier this year in anticipation of compensation claims. Close Brothers, another major car lender, has seen its market value collapse from £1.5bn to just £325m since the problem worsened, with lenders withdrawing and assessing legal risks.
The timing of the Court of Appeal ruling complicates the FCA’s ongoing investigation into mis-selling within the car finance industry. While the Financial Ombudsman Service broke away from the Financial Conduct Authority (FCA) last year to support consumer claims, the regulator’s investigation and any subsequent compensation plan are not expected to be completed before mid-2025. In the meantime, many companies remain… In a state of uncertainty, wary of lending to potential car buyers until the legal landscape becomes clearer.
Around 85 per cent of new cars and 65 per cent of used cars in the UK are purchased using finance arrangements, making this a critical issue for the automotive and banking sectors alike. If consumer credit costs rise or product availability falters, the consequences could ripple across dealers, lenders and manufacturers, hindering the post-pandemic recovery of Britain’s car market and wider economy.
Mr. Noon stressed that only coordinated action can restore the confidence of the global investment community. “Financial services, regulators and government will need to come together to provide that certainty to consumers, to the car industry and indeed to investment in the UK economy,” he said.
As lenders consider the consequences and look for a path forward, the risks could not be higher. As Britain strives to attract capital and reassert its position in global markets, the outcome of the car financing crisis may serve as an indicator of the country’s long-term regulatory stability and economic resilience.