Banks brace for another ‘mis-selling’ car crash as watchdog investigates
Inquiry prompts fear of new PPI-style scandal which could cost up to £16bn, finds Michael Bow
When Mrs Young spent more than £7,600 on a used car in 2016, little did she know the tsunami of woes she was about to unleash on the UK banking sector.
That’s because Mrs Young was ‘unfairly’ sold a loan to pay for her car.
Lloyds Banking Group’s finance arm, Black Horse, was the lender involved and had paid a commission to the car dealership to increase the rate on Mrs Young’s loan.
Mrs Young, whose first name has not been disclosed in case documents, subsequently challenged the terms of the loan. Her experience has become a test case at the centre of a major investigation into whether banks knowingly ripped off customers through mis-sold motor finance.
The Financial Conduct Authority (FCA) has launched an investigation into the matter and is expected to report back in September.
The inquiry has prompted fears that banks could be facing a new PPI-style scandal that could drag on for years and prove hugely costly.
Estimates as to just how costly vary: Citi predicts up to £9bn of possible charges for banks. HSBC analysts say the issue could cost as much as £16bn.
Last week merchant bank Close Brothers, which offered loans to car buyers across 4,000 dealerships, axed a £100m dividend over fears about the scale of the FCA investigation.
“The banks are in this holding pattern because it’s yet to be determined whether there is systemic harm with the discretionary commission models,” said Kate Robinson at Avyse Partners, which advises lenders on regulatory issues.
Like many drivers, Mrs Young had bought her car using a loan from Black Horse, which controls 20pc of the car finance market. It had been arranged at her car dealership by the salesman, who was also a regulated loan broker.
Unbeknown to her, the salesman stood to earn a secret commission if Mrs Young agreed to a higher interest rate on her loan. She had already been turned down for four other loans, making her more vulnerable to accepting the deal.
Mrs Young ended up paying hundreds of pounds more than she otherwise would have done, according to the Financial Ombudsman Service (FOS). Her compensation case, brought by the law firm Bott and Co, was upheld last month because she wasn’t told about the arrangement. She was awarded £630.
While her award is comparatively small, the scale of the car finance industry means the issue could prove massively costly if mis-selling is uncovered on a market-wide scale.
Mrs Young was one of thousands of people who took part in a car finance lending boom during the 2010s. Gross lending for private car sales at dealerships almost tripled between 2011 and 2018, from £14bn to £47bn according to HSBC.
The FCA has blocked any further compensation claims until its investigation is complete. It is looking at car loans from as far back as 2007.
Robinson says the issue is not “black and white”.
“The responsibility has been pushed towards the banks, but the brokers were involved in this process. From a lender’s point of view, these lenders have been held to the fire somewhat by brokers.”
While the official investigation may be ongoing, stock analysts have been quick to map the likely fallout.
According to HSBC, Lloyds is the most exposed because of its ownership of Black Horse. Estimates as to how much it may cost Lloyds range from £1.3bn to £2.4bn.
Investors are likely to raise the issue with Charlie Nunn, the Lloyds chief executive, this week when the bank delivers its annual results. Nunn is expected to reveal a big buyback of shares, with a £2.2bn payout forecast by the City. However, concerns about the car finance issue mean analysts are expecting the bank to register some form of remediation charge.
Lloyds is not the only bank involved. The ombudsman has also taken aim at Barclays, which made loans through its subsidiary Clydesdale Financial Services, trading as Barclays Partner Finance. The bank was ordered to pay compensation last month after the dealership failed to tell one customer, referred to as Miss L, about commissions during her car purchase in 2018.
Barclays is not expected to be as exposed as Lloyds because of its smaller presence in the market. According to HSBC, Barclays had a market share of just 2.5pc.
Gary Greenwood, an analyst at Shore Capital, said Barclays’ “tiny exposure” means settling the matter would likely be a “rounding error” for the bank.
Natwest on Friday said it had no exposure to car finance, while Santander has said it is too early to tell.
A Barclays spokesman said it welcomed the FCA review, adding: “Any customers that have questions regarding the circumstances of their car financing loan should contact us directly.”
A Black Horse spokesman: “We are reviewing the recent FOS decision and will support the FCA with the upcoming industry review.”