The car finance crisis will cost billions and investor confidence, a Lloyds boss has warned
The escalation of the car finance crisis could have a major impact on Britain’s economic prospects, according to the head of the country’s biggest retail bank.
Charlie Nunn, chief executive of Lloyds Bank, warned that the uncertainty created by the latest court rulings was undermining investor confidence and risking a storm of multibillion-dollar claims reminiscent of the PPI scandal.
Mr Nunn’s concerns follow a landmark ruling by the Court of Appeal which ruled hidden commissions paid to car dealers by banks illegal. The ruling, issued last month, effectively overturned a long-standing practice in the industry and appears to be against guidance previously issued by the Financial Conduct Authority (FCA). The court’s ruling that salespeople have a “fiduciary duty” to get the best deal for consumers has raised hopes that similar claims could spread beyond auto finance to other areas of consumer lending.
Speaking at an event organized by the Financial Times, Mr Nunn said: “Investors are looking at this and saying that this principle of the courts coming out with decisions without regulations … is bleeding into the whole economy.” He suggested that the uncertainty arising from the decision, combined with regulatory indecision, made it difficult for foreign and domestic investors alike to invest in the UK’s financial services and the wider economy.
The fallout is expected to be expensive. Industry observers have likened the situation to the payment protection insurance (PPI) scandal, which resulted in tens of billions of pounds in restructuring for UK lenders. Initial estimates suggest that motor vehicle compensation could be as high as £16 billion, with some claims management companies warning of as much as £40 billion in potential payouts.
The problem is starting to bite. Lloyds, which entered the market through its Black Horse subsidiary, took £450 billion earlier this year in anticipation of compensation claims. Close Brothers, another major car lender, has seen its market value fall from £1.5 billion to £325 million since the scandal escalated, as lenders scale back legal risks.
The timing of the Court of Appeal decision complicates the FCA’s ongoing investigation into unfair selling in the financial industry. Although the Financial Ombudsman Service split from the FCA last year to support consumer claims, the regulator’s own investigation and any subsequent compensation scheme are not expected to end until mid-2025. At the moment, many companies are still confused, wary of lending to potential car buyers until the legal situation is clear.
Around 85 per cent of new cars and 65 per cent of used cars in the UK are bought using finance schemes, making the issue critical for the car and banking sectors alike. If consumer credit costs rise or product availability falls, the effects could be felt by retailers, lenders and manufacturers, hampering the post-pandemic recovery of the British car market and the wider economy.
Mr Nunn stressed that only concerted action can restore the faith of the global investment community. “Financial services, regulators, and Government will need to come together to provide that certainty to consumers, the car industry, and indeed investment in the UK economy,” he said.
As lenders weigh the implications and look for a way forward, the stakes could not be higher. As Britain struggles to attract capital and reassert its place in global markets, the outcome of the car finance crisis could serve as an indicator of the country’s long-term regulatory and economic stability.
