Banks warn the UK Treasury of the risk of industry chaos following the auto finance ruling

Unlock Editor’s Digest for free

Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.

Lenders have held emergency talks with the UK Treasury and the main financial watchdog over the risk of turmoil in the consumer credit sector, days after a court ruling against auto finance commissions that threaten to disrupt many businesses.

Tuesday’s meeting between finance bosses, government officials and regulators highlighted anxiety in the auto finance industry about last week’s Court of Appeal decision, which Senior judges ruled in favor of consumers who complain about “secret” commissions on auto loans.

Judges found some commissions that lenders pay to car dealers for arranging loans were illegal, prompting lawyers to warn that the industry could face a compensation scheme often costly for customers.

The uncertainty caused by Friday’s ruling prompted the Finance and Leasing Association (FLA), which represents many consumer lenders, to attend an emergency meeting with Treasury Department officials. Government and the Financial Conduct Authority.

A person familiar with the negotiations said FLA representatives warned officials about the wide-ranging impact of the ruling, which would mean big businesses “really” not complying with the law and therefore That must urgently change their system.

Lawyers said the ruling was a devastating defeat for the industry and could expose other financial sectors to legal challenges. It prompted analysts to raise their forecasts for compensation costs facing auto finance companies, which they had estimated could cost the industry up to £16 billion.

Stephen Haddrill, director general of the FLA, said after the ruling that it was “significant” and had implications “far beyond motor finance, making it an issue that requires immediate attention from the FCA” .

The ruling could have implications for a range of lending practices that involve consumer finance providers paying hidden commissions to brokers, according to trade bodies and legal experts. .

It has prompted FTSE 250 lender Close Brothers to suspend all motor finance lending. The bank, which has the highest relative exposure to auto finance of any lender, has lost more than half its market value since regulators first announced it in January. They are investigating this area.

Lloyds Banking Group, which owns Black Horse, Britain’s largest car finance business, said the ruling sets a “higher standard” for disclosure and agreeing to receive commissions than at a rate “understood to be mandatory or applicable throughout the entire auto finance industry prior to the ban”. decision”.

The FTSE 100 company said it was “assessing the potential impact of the decisions, as well as any wider implications, pending the outcome of the appeal”. And Spanish bank Santander Publication delayed on its full outcome in the UK as it seeks to quantify the impact of Friday’s ruling.

In addition to Close Brothers, the ruling also sided with consumers against FirstRand. The South African lender said the decision had “far-reaching and severe negative implications for the motor finance industry and the wider consumer finance sectors in the UK”.

The FCA launched an investigation into possible mis-selling of car finance this year and will update the market on next steps in May.

Lawyers and analysts said Friday’s ruling makes it more likely that the watchdog will implement a costly remediation plan for the lender, mirroring the remedy for the underwriting scandal. Payment protection (PPI) caused the banking industry to lose nearly 50 billion pounds.

FCA said last month that it was extending the suspension it imposed this year on claims from customers seeking to recover from the cost of car finance until December, to there is time for various court rulings expected to shape the outcome of the investigation.

Barclays is appealing a ruling by the Financial Ombudsman, which handles consumer complaints against financial services firms, which allowed customers to overcome problems with car finance issued by their banks. supplies. Close Brothers and First Rand both said they would appeal Friday’s ruling.

The FLA, FCA and Treasury did not immediately respond to requests for comment.