Car finance redress bill could hit £25 billion

The Bank of England’s “crude but prudent” estimate suggests auto finance lenders could face a total bill of some £25 billion as a result of the recent Court of Appeal ruling on the need to ensure commission is disclosed to customers, and that they gave informed consent. Last month ratings agency Moody’s put the figure at £30 billion.

The issue was highlighted in the resilience section of the latest Financial Stability Report, where the Bank noted: “Some lenders face uncertainty over the potential for redress payments associated with certain historic commission payments.”

The report went on to point out: “Equity prices for some potentially exposed banks declined following the Court of Appeal ruling, reflecting market perceptions that the potential for higher redress payments could weigh on future profitability.”

Close Brothers, a major motor lender, has seen its value drop from £1.5bn to just £325m over the course of this year.

Headwind

‘We did not attempt to make a point estimate on that particular issue. What we did instead was take a crude but I think prudent approach.’

This meant the Bank took the average of the conduct hit from the first two years of each of the last three “stress tests” and ran that for every year of the test. The result was a £25 billion hit through the course of the test, which Woods described as “quite conservative”, as in the previous tests the costs were heavily front-loaded.

Woods said: “We’ve been spending a lot of time on that issue”, but maintained that “even while taking a hit of that size, the system still has plenty of headroom.”

“We do not consider that issue to be a risk to financial stability. But misconduct has often been quite a significant headwind and our job is to make sure that we’re capturing that appropriately in the stress testing that we do,” he added.

Uncertainty

With the auto finance sector awaiting news of whether the two lenders involved in the Court of Appeal ruling (First Rand trading as Moto Novo and Close Brothers) can take an appeal to the Supreme Court, the considerable uncertainty over what the ruling means and the size of any compensation regime is a source of major concern.

Charlie Nunn, chief executive of Lloyds Bank which has already announced a £450 million provision for redress claims involving discretionary commission payments made by its Black Horse auto lending arm, told at FT event that fears about courts overruling regulation were harmful to the economy.

“For this sector the uncertainty really does make it difficult for investors to have the confidence to provide us the capital to make a thriving industry.

“Financial services and regulators and the Government are going to need to come together to provide that certainty for consumers, for the car industry, and actually for investability in the UK economy,” Nunn cautioned.

“But in the absence of immediate and firm action by government and lawmakers, it is now up to those in the industry to work together to forge a way forward that is far for consumers, lenders and brokers.

“Most lenders and brokers believe this judgment creates barriers to growth by increasing compliance burdens and limiting flexibility. But might it actually pave the way for a more sustainable and transparent industry?

“That’s what our industry thought leaders will be exploring in our AFC end-of-year discussion, online on Tuesday 10th December. I urge everyone with concerns about what the judgment means and what the future holds to join in and hear the arguments.”

Register now for the AFC end-of-year discussion webcast, sponsored by NETSOL Technologies, with AFC’s David Betteley and John Rees, and NETSOL Technologies’ Sales Director – Europe, Jason Hurwitz.