12:16 pm, November 5, 2024
The ongoing motor finance crisis is unlikely to be as big as the PPI scandal but banks’ credit ratings could still be downgraded.
That is according to leading American credit rating agency, Fitch Ratings, which says the current scenario is likely to have ‘large financial implications’.
The outfit has been closely monitoring the unfolding situation since last month’s landmark Court of Appeal ruling, which sparked panic in the finance industry.
Experts at the company say that the likes of Lloyds, Santander and Barclays are best suited to ride out the current crisis, due to their ‘large pre-impairment profits and capital, and relatively small exposure to motor finance’.
However, they have warned that all lenders are potentially at risk of their credit ratings being impacted if ‘remediation costs begin to affect earnings, capital ratios and business growth prospects over a prolonged period’.
Whether that will happen remains to be seen but Fitch does say that the recent ruling ‘materially increases the likelihood of a redress scheme to compensate customers’.
The Finance Commission Story So Far
- FCA needs to answer serious questions over car finance Court of Appeal decision
- Car finance slowly starting up again as lenders change systems and some freeze commission payments
- Chaos: Car finance grinds to a halt in wake of Court of Appeal decision
- Close Brothers stops underwriting new dealer finance after court ruling
- FCA chief executive calls for clarity over motor finance judgement
- Car finance pauses as banks figure out legal implications – who has stopped lending?
- Honda ‘pulls car finance and delays customer handovers’
- FLA: Court of Appeal ruling was ‘very unexpected’ but ‘welcome’
- Could car finance commissions case become the next PPI ‘scandal’?
- Short-term headache or genuine game-changer? What mounting finance crisis means for dealers
‘The ruling materially increases the likelihood of a redress scheme to compensate customers, which could have large financial implications,’ says the firm in its analysis.
‘We do not expect potential compensation costs to be as large as those for mis-selling payment protection insurance.
‘UK banks’ profitability has strengthened in recent years, supported by higher interest rates and contained impairment costs. However, more ratings could come under pressure if remediation costs affect earnings, capital ratios and business growth prospects over a prolonged period.
‘Lloyds Banking Group, Santander UK and Barclays have the strongest loss-absorption capacity due to their large pre-impairment profits and capital, and relatively small exposure to motor finance.
‘The ruling is also likely to prompt stricter regulatory scrutiny and necessitate changes in business practices to ensure compliance with disclosure requirements.
‘Lenders may need to reassess their agreements with brokers and dealerships to limit the risk of legal challenges and having to pay compensation. ‘
Close Brothers under review
The first lender to pull new business in the wake of the court ruling was Close Brothers, against whom the original decision was made.
The immediate aftermath saw the company’s share price plummet and the situation did not go unnoticed by Fitch.
In response, the outfit has placed the ratings of Close Brothers Group on ‘Rating Watch Negative’, meaning its credit rating could be downgraded, pending a review.
Fitch says the decision was made due to Close Brothers’ ‘relatively high exposure to motor finance and smaller loss-absorption capacity in absolute terms’.
The outfit says: ‘The Court determined that commissions were not adequately disclosed to customers, resulting in a lack of informed consent.
‘The three cases brought were small in financial terms but the verdicts go beyond the requirements set out by the Financial Conduct Authority (FCA) and could set a precedent that leads to significant liabilities for motor finance lenders.
‘The ruling also raises considerable uncertainty over the implications of the FCA’s investigation of historical discretionary commissions for motor finance, announced in January.
‘Fitch placed the ratings of Close Brothers Group on Rating Watch Negative due to the lender’s relatively high exposure to motor finance and smaller loss-absorption capacity in absolute terms.
‘Other lenders that have been significantly involved in motor finance lending, whose ratings are not immediately affected, include Bank of Ireland UK, Barclays, Investec Bank Plc, Lloyds Banking Group, Paragon, Santander UK, and FirstRand Bank Limited due to its ownership of MotoNovo.’
The full analysis by Fitch Ratings can be seen here.
