Physical Address

304 North Cardinal St.
Dorchester Center, MA 02124

Banks warned that motor finance scandal could hit credit ratings

Banks’ credit ratings could be hit by a brewing motor finance scandal over the commissions lenders pay to car dealers for arranging loans, Fitch has warned.
The rating agency said “lenders face considerable uncertainty and potentially significant implications” after a court ruling that found in favour of customers, opening the door to a flood of potential claims.
A fortnight ago the Court of Appeal decision, which focused on cases brought by consumers against the lenders MotoNovo Finance and Close Brothers, said that car dealers had to act in the best interests of consumers and fully disclose any commissions they were paid by lenders.
By not telling the customer about the financial arrangement with the bank there was a lack of “informed consent” and a “conflict of interest”, the court said, because the car dealers are acting as credit brokers.
The initial cases brought before the judge were small but Fitch believes that the verdict has broader ramifications for the industry and sets “a precedent that leads to significant liabilities for motor finance lenders”.
It does not believe, however, that the compensation will be as large as for payment protection insurance mis-selling, it said. Between January 2011 and December 2019, UK banks paid more than £38 billion in compensation to customers for mis-sold PPI.
The Royal Bank of Canada has estimated that the industry’s bill for motor finance compensation could stretch to £13 billion.
Indicating the possible fallout from the case at the time, shares in Lloyds Banking Group, Britain’s largest motor finance player, fell more than 7 per cent after the decision and Close Brothers, the company most exposed to car finance, had a quarter knocked off its share price. It has vowed to appeal against the decision.
• Secure Trust Bank issues profit warning after motor finance review
Fitch put the lender on “rating watch negative” last week, meaning that its credit rating is under review for a possible downgrade.
Other exposed lenders include the Bank of Ireland, Investec and Santander.
The Financial Conduct Authority is assessing the broader impact of this ruling on the industry with a view to clamping down on compliance and putting in place further regulation. Earlier this year it started a wide-ranging review of commissions in financing deals dating back to April 2007 following a rise in consumer complaints. It will report its findings by May 2025.
In February Lloyds set aside £450 million to cover the cost of potentially having to compensate motor finance customers. It has suspended any new commission payments. Santander has paused the publication of its third-quarter results to assess the impact of the ruling and Investec set aside £30 million.
Credit ratings are important for banks to secure affordable capital, maintain operational stability, and foster trust among customers and investors.

en_USEnglish