Following a landmark Court of Appeal ruling, the UK car finance industry is facing major disruption as major lenders temporarily suspend new finance deals.
The unexpected decision has placed lenders under greater liability for not disclosing commission payments, leading to urgent consultations with regulators and ministers to find a quick solution.
The court ruling, which imposes a duty on brokers to explicitly disclose the commission they receive to clients, has shaken the industry. At least three prominent financial services providers – Close Brothers, Moto Novo and Honda Finance Europe – have announced an immediate halt to new credit approvals, while others such as BMW, SecureTrust Bank and Blue Motor Finance are also understood to have… Zopa has temporarily suspended lending.
Gary Greenwood, a financial analyst at Sure Capital, warned of an imminent halt in car sales, as financing represents the majority of new and used car purchases. “There is a very real risk that the industry will go out of business,” he added. He explained that lenders are currently “very cautious about extending credit to customers.”
With around 5,200 new cars sold every day in Britain – most of them financed through credit arrangements – the potential impact on the car sector and the wider economy will be severe. Stephen Haddrill, director general of the Finance and Leasing Association (FLA), criticized the timing of the ruling, which comes ahead of a government budget aimed at stimulating growth. “This ruling undermines the assertion that the UK is becoming a more investable place for business,” Haddrill commented, adding that their European counterparts are puzzled by the decision, as Britain’s credit systems are already among the strictest.
After the decision, lenders are required to disclose the amount of commissions and obtain explicit consent from customers, processes that were previously discretionary. Haddrill noted that without a solution, car sales could slow to a trickle. He noted that transactions are either pending or delayed to accommodate new compliance papers.
The Financial Conduct Authority (FCA) is monitoring the situation closely. Its CEO, Nikhil Rathi, acknowledged the need for clarity in the industry and expressed hope that the Supreme Court would soon review the case to resolve the ongoing uncertainty. The ruling’s scope extends beyond the automobile market, potentially affecting business equipment leasing and other credit-based transactions. For the auto financing industry, the financial liabilities can be significant.
Banks exposed to the ruling’s effects are bracing for more impacts, drawing comparisons to the costly Payment Protection Insurance scandal. Analysts expect significant liabilities, with UK bank Santander expected to incur costs of £1.1bn, while Lloyds Banking Group – which has already set aside £450m in provisions – could face a bill of up to £2.5bn. Close Brothers, Barclays and Investec have also announced potential fallout.
UK bank Santander has postponed its third-quarter results as it calculates potential liabilities associated with car financing. Parent company Grupo Santander has indicated that impacts on future financials remain uncertain, with the CFO citing a potential cost of less than £500m. However, Royal Bank of Canada analysts have a more cautious view, estimating liabilities that could reach £1.8 billion.
As the UK car finance industry faces this legal and regulatory turmoil, industry leaders are calling for an urgent solution to avoid long-term damage.
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