Secure Trust Bank exits consumer vehicle finance amid industry commission scrutiny

Secure Trust Bank PLC has announced a significant strategic shift, confirming its exit from new lending in consumer auto finance. The decision comes at a pivotal moment for the wider motor finance industry, which is bracing for a regulatory ruling on commission disclosure practices, a development that has placed heightened scrutiny on consumer vehicle finance providers across the UK.

Strategic exit from segment which is at risk of being viewed as risk-exposed

The bank will place its existing auto finance book – totalling £558.3 million as of December 2024 – into run-off, citing persistently low returns and sub-scale operations. The business reported a £21.8 million pre-exceptional loss in FY2024 and consumed approximately 30% of the Group’s adjusted operating costs.

Although Secure Trust Bank’s announcement does not reference the upcoming ruling directly, the timing and nature of the exit seems likely to have been influenced the decision to exit. Even if the Supreme Court decision expected this month is positive, the sector is increasingly being seen as coming with significant regulatory risk, increasing the costs to borrowers and likely to reduce the returns for lenders.

By exiting this segment, the bank anticipates a pro forma uplift in adjusted pre-tax profit from £39.1 million to £56.6 million, and an estimated 8 percentage-point improvement in Return on Average Equity (ROAE).

Restructuring and future strategy

The strategic exit is expected to reduce annual operating costs by over £25 million by 2030, though it will also result in approximately 284 roles being made redundant over that period. The bank will record approximately £5 million in restructuring costs.

Vehicle Finance will be reclassified as a non-core activity starting in FY2025. A more detailed strategic roadmap will be shared at the Group’s upcoming interim results on 14 August, with further updates expected at a capital markets event in Q4 2025.

Commission disclosure crisis

The Financial Conduct Authority (FCA) is expected to rule later this month on whether historic commission arrangements between lenders and car dealers were properly disclosed to consumers. The outcome could trigger a wave of claims across the industry, with several lenders already facing reputational and legal exposure.

By formally stepping back from consumer vehicle lending – especially in sub-prime and near-prime segments – Secure Trust Bank would seem to believe that the risks and rewards are unlikely to stack up anytime soon.

Industry comment

“We can’t be sure that Secure Trust Bank’s withdrawal is a direct response to the legal uncertainty and financial risks posed by the impending Supreme Court decision on discretionary (and other) commission models in motor finance, a decision that could reshape the fundamentals of auto lending, but it seems highly likely that this is the catalyst driving the decision.

“This is a prime example of the unintended consequences of the regulatory mess that the UK is facing. Indeed, the FCA and Charlie Nunn (CEO of Lloyds Banking Group) are on record stating that the industry faces a potentially structural shock, leading to Banks withdrawing from the market, therefore reducing customer choice and reducing competitiveness which of course means that customers will have to pay more in the future.

“Charlie Nunn went on to state that due to the confusion over who regulates the industry in the UK (The FCA, FOS or the Courts) that the UK financing industry (not just auto) is becoming un-investable.

“Moreover, it is entirely possible that (if) following the Supreme Court decision, excessive fines are levied (fuelled in part by the egregious activities of the CMC’s) then some companies may go out of business and of course that would mean zero, or a few pence in the pound compensation for customers.

“There could also be further knock on consequences following the Supreme Court decision (if) more auto finance companies decide to exit and liquidate their portfolios, resulting in a flood of used cars entering the market with the resulting downward pressure on prices, in turn generating losses for GMFV’s and RV’s.

“AFC are working closely with Shoosmiths to monitor this developing situation, and we will be running an industry webcast as soon as the Supreme Court decision has been delivered. Please therefore, keep a look out for further communication from AFC.”