Finance stocks related to automobiles see a surge following a ruling on mis-selling, however, analysts issue caution due to potential inadequacy in compensation.
The projected compensation bill for lenders in the UK car finance scandal has been significantly reduced following the recent Supreme Court ruling and the Financial Conduct Authority’s (FCA) redress scheme plans. The FCA now estimates the total cost to lenders will be between £9 billion and £18 billion, a sharp cut from earlier projections of £30 billion to £44 billion.
Key points supporting this projection:
- The Supreme Court ruled in favor of lenders in the motor finance commission litigation, limiting their liability concerning hidden or discretionary commission arrangements. This ruling ended the expectation of very large compensation payouts, with many claims stayed pending the Supreme Court outcome.
- The FCA plans to introduce a redress scheme by October 2025 to compensate motorists harmed by discretionary and possibly some non-discretionary commission arrangements. In most cases, payments to customers are likely to be less than £950 per claim.
- Despite the ruling, some residual liabilities may remain under specific legal provisions or further regulatory steps under consultation.
The ruling could have potentially led to £44 billion of payouts, but the actual compensation bill is now much smaller. The scheme is expected to "draw a line under the car finance scandal," markedly reducing the anticipated financial burden on lenders relative to earlier estimates.
The FCA is expected to detail its proposed consultation by early October. AJ Bell, Hargreaves Lansdown, interactive investor, InvestEngine, and Trading 212 are DIY investing platforms mentioned in the article.
RBC forecasts £3.8 billion would come from banks, and £7.7 billion would come from non-banks. Close Brothers, which had previously set aside £165 million, has provided no update to its provision. Lloyds Bank has kept its £1.2 billion provision for motor finance claims under review. Barclays has yet to comment on its provision for motor finance claims.
Stephen Haddrill, director general of the Finance & Leasing Association, expressed concerns about the feasibility of a fair redress scheme that goes back to 2007. The FTSE 100 Lloyds shares jumped 5.9 per cent in early trading after the ruling, while Barclays, which has relatively little exposure to the scandal, was up 1.7 per cent.
[1] Source: Financial Times [2] Source: Shore Capital Markets [3] Source: RBC
- The Supreme Court ruling and FCA's redress scheme plans have significantly reduced the projected compensation bill for lenders involved in the UK car finance scandal, with the cost now estimated between £9 billion to £18 billion.
- The banking and insurance industry has been following this development closely, as the anticipated financial burden on banks and non-banks has been markedly reduced, with RBC forecasting £3.8 billion for banks and £7.7 billion for non-banks.
- The car finance scandal, marked by hidden or discretionary commission arrangements, has been a point of contention in the finance industry, sparking a redress scheme by the FCA to compensate affected motorists.
- The ruling on motor finance commission litigation has potential implications for the broader investing and finance industry, as it highlights the impact regulatory decisions can have on financial compensation payouts and business operations.
