UK Banks Face Potential £1 Billion Compensation Over FCA Motor Finance Review
London, City A.M. — UK banks may be liable for compensation exceeding £1 billion, as analysts project potential losses of between £2 billion and £8 billion in the motor finance sector. The Financial Conduct Authority (FCA) initiated a review into unfair costs related to discretionary car finance commissions, raising concerns for banks, particularly Lloyds, which could see a pretax profit impact ranging from £270 million to £1.2 billion. The FCA’s investigation encompasses approximately £300 billion in lending, focusing on historical motor finance commission arrangements and sales. Analysts suggest that uncertainty is high, and the review could lead to increased provisions at banks, affecting their profitability. The FCA will outline the next steps in the third quarter of this year.
Lloyds Bank Impact:
- RBC analysts estimate a potential pretax profit impact of £270 million to £1.2 billion.
- Barclays projects a potential provision range of £0.5 billion to £1 billion for Lloyds.
- Bank of America downgrades Lloyds due to high exposure, causing a 2.5% drop in shares.
Overall Sector Impact:
- RBC analysts estimate an overall downside impact of £2 billion to £8 billion for the motor finance sector.
- Barclays projects a potential provision range of £30 million to £150 million for Barclays.
- Close Brothers, a merchant banking group, could experience a profit hit ranging from £20 million to £120 million, with shares falling 3.6%.
Background:
- The FCA banned certain commission models for car finance in 2021, but pre-ban commission arrangements have raised concerns.
- The FCA aims to ensure consumers receive an appropriate settlement if evidence of widespread misconduct is found.
- Analysts highlight uncertainties, including the review’s scope, how far back it goes, the proportion of loans via brokers, and potential customer refunds.
- Martin Lewis, a financial expert, suggests the compensation scale could be comparable to PPI.
Conclusion:
- Banks may face increased provisions and administrative costs.
- Implications for insurance premium financing are noted following the FCA’s criticism of insurance premiums as a “poor product” and a “poverty premium.”
Reference: City A.M.
