Lloyds Banking Group has scrapped commission payments across its £15bn motor finance arm after a landmark ruling on car loan misselling, as industry and Treasury officials hold urgent talks amid fears of contagion across the wider financial sector.
The moves follow last week’s court of appeal judgment, which agreed that consumers could not have consented to loans that involved “secret” commission payments to brokers and car dealers.
The shock decision has already forced the likes of Close Brothers – which was a defendant in the case – to pause all new lending as it prepares to challenge the ruling in the supreme court.
Lloyds, which is the biggest motor finance provider among the UK’s high street banks, has continued to issue new loans. However, the bank has had to “adapt quickly”to do so, its chief financial officer, William Chalmers, told analysts.
That has involved immediately cancelling commission payouts to brokers from its Black Horse car finance division, which oversees £15bn worth of loans.
It has already put aside £450m for potential compensation, but analysts at RBC Capital believe the court decision could end up costing the lender between £2.5bn and £3.9bn in the worst case scenario. Lloyds shares have fallen nearly 13% since Friday.
Chalmers’s comments, summarised in an RBC note, came as senior officials from the Treasury and Financial Conduct Authority (FCA) held a second urgent meeting with the Finance and Leasing Association (FLA) after an initial call last Friday.
The FLA – which represents car lenders ranging from big banks such as Barclays to the finance arms of carmakers including Ford and Volkswagen – is concerned that the ruling could severely disrupt lending, particularly if firms end up on the hook for much larger compensation payments than had been anticipated from the FCA examination of the issue that began in January.
That investigation, which only covers a practice banned in 2021 known as discretionary commission arrangements (DCA), was already expected to collectively cost the motor finance industry between £8bn and £13bn. That estimate includes £1.1bn for Santander UK and £375m for Barclays, which ditched its motor finance business in 2019.
Analysts estimate that the much-smaller Close Brothers, which has already been forced to cancel dividends and strengthen its balance sheet by £400m, could suffer a £252m blow. Its shares have plunged more than 37% since Friday.
Lenders argue the court of appeal decision sets a higher bar for disclosing commission arrangements and securing customers’ consent than they previously thought was necessary under FCA rules. Santander UK delayed the release of its quarterly results on Tuesday as it scrambled to review last week’s ruling.
The FLA is now calling on authorities to urgently extend an official pause on response times on complaints. The industry wants the pause to extend beyond DCA complaints, to ensure lenders are not penalised for taking longer to respond to new grievances over other types of commission related to motor finance.
“We are considering this carefully and working at pace through the potential benefits and risks of doing so,” the FCA chief executive Nikhil Rathi said in a speech on Tuesday.
He added that the regulator was “working closely with the financial services sector, the Financial Ombudsman Service and the government to understand any wider consequences and further steps needed”. More meetings are expected in the coming days.
The FLA said “an expedited path to the supreme court would be a first step to restoring certainty”.
But there are growing concerns that the court of appeal judgment – which also ruled against specialist lender FirstRand – could expose lenders to complaints over commission payments across other financial products.
Those fears prompted the banking industry body UK Finance to hold a call with a large number of its members on Tuesday to discuss the court ruling and its implications.
The consumer champion Martin Lewis has said the ruling “has the potential to shake up more than just car finance”.
“It’s important to understand this wasn’t a ruling on the FCA rules, but on common law,” he said in a post on his Money Saving Expert website. “So, unless overturned by the supreme court, it means ALL relevant commissions needed declaring this way, not just DCAs – a seismic change.”
The Treasury was contacted for comment.