EXTRA: UK Treasury intervention is big reprieve for car finance firms

(Alliance News) - A report that the Treasury is seeking to protect car loan providers against multi-billion pound payouts relating to a potential mis-selling scandal is "significant" and "clearly positive for the UK banks with motor finance exposure", analysts on Tuesday said.

Late Monday, the Financial Times said the Treasury has taken the unusual step of seeking permission to intervene in a forthcoming Supreme Court case, amid concerns that banks and other lenders could face a compensation bill costing tens of billions of pounds.

Russ Mould at AJ Bell explained the Treasury appears eager to ensure that lenders (and the UK economy) "aren't derailed by the issue and any redress is simply proportionate to the loss suffered, rather than significantly greater sums inflated by large compensation payments."

In response, shares in Close Brothers Group PLC surged 23% to 300.32 pence each in London on Tuesday. Lloyds Banking Group PLC rose 4.0% to 61.00p and Barclays PLC by 0.8% to 294.10p. S&U PLC shares were up 15% to 1,682.00p.

The FT report said Chancellor Rachel Reeves fears that the case could cause chaos in the motor finance and car industry, making it harder for consumers to get loans. About 80% of new vehicles in the UK are bought on finance.

Reeves fears the huge potential payouts would have a chilling effect on the banking sector, stunt growth and damage the country's pro-business reputation, the FT said.

In April, the Supreme Court is due to hear an appeal brought by car loan providers challenging an October ruling from the Court of Appeal that sided with consumers who complained about "secret" commissions on car loans.

The judgment ruled that it was unlawful for banks to pay a commission to a car dealer without the customer's informed consent.

In a submission to the Supreme Court, seen by the FT, the Treasury claims the case has "potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers".

The Treasury application said that the case might "generate a perception that regulation in the UK is uncertain".

RBC Capital Markets said the news is "clearly positive" for the UK banks with motor finance exposure and called the move by the Treasury "unprecedented".

"Nevertheless, it's worth noting that we have a clear separation of powers in the UK, so the ultimate outcome will be solely determined by the views of five Supreme Court Judges hearing the case in April. In our view, there has been a clear sentiment change from both the regulator (Financial Conduct Authority) and the government on this topic in the last two months, with both institutions rallying behind the banks."

RBC's base case impact assessment for motor finance assumes that the Supreme Court overturns the Court of Appeal's decision.

"Our downside scenario assumes that the decision is upheld. Our models include a blend of these two scenarios. On this blended view, our estimate for the sector-wide impact from motor finance is GBP25 billion, of which we estimate that around GBP8 billion will fall on the shoulders of UK banks. This increases to GBP33 billion in our downside scenario (of which UK banks' impact around GBP11 billion).

Gary Greenwood, banking analyst at Shore Capital said this is a "significant" development for the industry that could reduce the potential liability - for which estimates of GBP30 billion plus have been suggested by a number of commentators, including Moody's - and so losses incurred.

By Jeremy Cutler, Alliance News reporter

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