Moody’s predicts £30 billion hit for auto finance lenders

Santander UK has announced it is setting aside £295 million to cover potential costs arising from auto finance commission disclosure claims, as credit ratings agency Moody’s released estimates suggesting lenders could face an overall compensation bill of as much as £30 billion.

At the end of October, Santander delayed the release of its UK results for the quarter ended 30 September 2024, saying it needed to assess its position following the Court of Appeal judgment on 25 October relating to dealer commissions on motor finance transactions.

The revised figures show the lender has now recognised a provision of £295m in the Q3 2024 results. This includes estimates for operational and legal costs and potential awards, based on various scenarios using a range of assumptions.

These include the outcome of any Supreme Court appeal, the scope and timeframe of any redress scheme, applicable time periods, claims rates and compensatory interest rates.

Santander’s regulatory statement cautioned: “There are currently significant uncertainties as to the nature, extent and timing of any remediation action if required and the ultimate financial impact could be materially higher or lower than the amount provided.” However, the bank noted it remained well capitalised, “with significant buffers over regulatory requirements”.

The bank said Santander Consumer (UK) (SCUK) had received a number of county court claims and complaints in respect of its historical use of discretionary commission arrangements (DCAs) prior to the 2021 rule changes, following the Financial Conduct Authority (FCA) market review in 2019.

DCAs are now the subject of an FCA review, announced at the start of the year, and Santander notes that the outcome of this review and/or adverse outcomes from litigation could result in material costs.

A claim has also been issued against SCUK, Santander UK plc and others in the Competition Appeal Tribunal (CAT), alleging that SCUK’s historical DCAs in respect of used car financing operated in breach of the Competition Act 1998. This is currently paused until the end of July 2025 connected to the outcome of the FCA review.   

Santander maintained that the uncertainties over the extent of any misconduct, as well as the perimeter of commission models, meant it is not practicable to quantify the extent of any remaining contingent liability.

Total bill

However, in a briefing note Moody’s has warned that the total bill for auto finance lenders could hit £30 billion, suggesting that while larger lenders such as Lloyds Banking Group, Barclays and Santander UK may be able to withstand the impact, more specialist lenders such as Close Brothers, Aldermore, Investec and Ford and Volkswagon’s captives may face a “a more significant hit to earnings and capitalisation”.

Lloyds Bank, parent of Black Horse, set aside £450 million to meet potential commission disclosure claims  in February, while Investec has disclosed a £30 million provision and FirstRand, the South African owner of MotoNovo, one of the lenders involved in the Court of Appeal ruling, has allocated  £127.4 million for future claims.

BMW Financial Services set aside £70 million in its 2023 accounts which were finalised before the Court of Appeal ruling, and noted “considerable uncertainty” about the potential future liability facing the captive lender.

“This will of course be a big topic at our conference next Tuesday (26^th November) which is fast becoming the largest event we have ever run.

“No surprise. I cannot imagine that any lender or intermediary would miss it.”

For more details and to book your place visit the AFC conference website or email Louise Clavey at louiseclavey@assetfinanceconnect.com