The chief executive of Lloyds Banking Group has said controversy over now-banned motor finance deals poses a threat to the UK economy.
Speaking at the Financial Times’ Global Banking Summit on Wednesday, Charlie Nunn said a shock court ruling in October over “secret” car loan commissions “creates an investability problem” for Britain’s wider consumer finance sector.
The motor finance industry was rocked in November when senior judges ruled that a lender could not pay commission to a motor finance broker without obtaining the customer’s informed consent.
The ruling has made it more likely that the Financial Conduct Authority (FCA) will implement a multibillion-pound redress scheme as part of its review of the so-called discretionary commission arrangements, which were banned in 2021.
“The level of uncertainty means we just don’t know what it’s going to mean yet,” Nunn said.
“We have a legal decision, a Court of Appeal decision, that is at odds with the last 30 years of regulation. And the uncertainity that creates in our environment is unique, it’s very different from other economies in the world.”
Lloyds’ share price has dropped 14 per cent since the ruling. It is considered the most exposed bank to the FCA’s review, owning the UK’s biggest auto lender Black Horse.
Lloyds Bank’s motor finance exposure
In February, Lloyds set aside £450m to cover potential costs from the probe, although analysts at RBC have estimated that it could take a total profit hit of up to £3.9bn.
Nunn argued that motor finance is “a really important part of the British economy”, with 85 per cent of people borrowing to buy a new car and roughly 60 per cent for second-hand cars.
He added that the level of uncertainity made it more difficult for Lloyds’ own investors “to have the confidence to provide us the capital” to make consumer finance a “thriving industry”.
“I’ve met over 100 investors in the last few weeks, and investors are telling us that they’re really concerned about the uncertainty this creates on that sector, on the financial sector, and the UK more broadly,” Nunn said.
Lawyers have said October’s ruling could set a precedent for other areas of consumer finance beyond car loans. Close Brothers and South African bank FirstRand, the lenders involved in the test case, have said they will appeal the ruling to the Supreme Court.
“Already investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation, which is then having a significant retrospective lookback, is already bleeding across the whole economy,” Nunn said.
“The industry, both financial services and transport, the regulators, and the government are going to need to come together to provide that certainty for consumers, for the car industry, and actually for investability in the UK economy.”