Shares in UK motor finance providers rose sharply on Monday after the UK’s financial regulator gave a range of outcomes as it unveiled a redress scheme for customers impacted by car financing agreements.
The Financial Conduct Authority on Sunday said it will consult on an industry-wide redress scheme for consumers ‘treated unfairly’ by car financing agreements, which it estimated will cost lenders between £9 billion and £18 billion.
The FCA said it will publish the consultation by early October and finalise any scheme in time for people to start receiving compensation next year.
The financial watchdog was responding to a ruling on Friday by the UK Supreme Court.
The court partially overturned judgments that said controversial car loans were unlawful, but did uphold one case, which allows the claimant to seek compensation on different grounds.
The Supreme Court decision mostly overturned judgments made by the Court of Appeal last year that ruled it was unlawful for car dealers to receive a commission on loans without sufficiently informing borrowers.
In some cases, these loans – available for 14 years from 2007 – allowed car dealers to offer higher interest rates in return for a bigger commission from banks.
The court ruling means that dealers have leeway when arranging loans, without requiring explicit consent from borrowers for terms that may benefit lenders.
Analysts at Citi said the outcome ‘greatly limits the worst case redress scenario, as we now expect only 48% of lending to be in scope of the FCA consultation. We consequently lower our assumed charge for the industry to £9.0 billion.’
On Sunday, the FCA said its ‘detailed review’ of the past use of motor finance has shown that many firms ‘were not complying with the law or our disclosure rules that were in force when they sold loans to consumers. Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way.’
The FCA said the Supreme Court’s ruling offers ‘clarity because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts.’
In total, the regulator thinks it is unlikely that the cost of any scheme, including administrative costs, will be materially lower than £9 billion and it could be materially higher.
‘While there are plausible scenarios which underpin estimates of a total cost as high as £18 billion, we do not consider those scenarios to be the most likely and analyst estimates in the mid point of this range are more plausible,’ the FCA said.
The FCA currently estimates that most individuals will probably receive less than £950 in compensation per agreement.
A string of London-listed motor finance providers responded to the Supreme Court ruling and FCA announcement early Monday.
Lloyds Banking Group PLC said it currently believes that any change to the £1.2 billion provision it has made is ‘unlikely to be material in the context of the group’.
‘Whilst the judgment announced on 1 August provides additional clarity, there remain a number of uncertainties that the group continues to consider in its approach to provisioning,’ Lloyds said in a statement.
Close Brothers Finance PLC, part of Close Brothers Group PLC, said it looked forward to engaging with the FCA in respect of the consultation.
S&U PLC said it welcomes the Supreme Court decision and called it a ‘victory for common sense’.
Chair Anthony Coombs said: ‘This decision is a victory for common sense. It will significantly boost confidence throughout the motor finance industry and benefit lenders and consumers alike in attracting investment and increasing competition.’
Shares in Lloyds Banking rose 7.6% to 81.46 pence each in London on Monday morning.
‘We see Friday’s SC judgement as a clearing event for the bank,’ said analysts at RBC Capital Markets which upgraded the lender to ’outperform’ from ’sector perform’.
Close Brothers jumped 20% to 476.20p, S&U leapt 14% to 1,975.92p and Vanquis Banking Group PLC climbed 6.0% to 101.93p.
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