Some UK banks could be forced to rein in share buybacks as the Financial Conduct Authority (FCA) mulls whether to expand a probe into now-banned car loan deals, analysts have warned.
City analysts said broadening the scope of the review into so-called discretionary commission arrangements (DCAs) between lenders and car dealers threatened to increase the sector’s exposure to potential compensation costs, which some have estimated could reach £23bn.
The FCA, which has been reviewing DCAs since January, said on Wednesday it would launch a two-week consultation to extend the time motor finance providers have to deal with commission complaints.
Lenders are bracing for an avalanche of cases after the Court of Appeal last month ruled it illegal for banks to pay a commission to a motor finance broker without obtaining the customer’s fully informed consent. Lawyers have said it could set a precedent for other areas of consumer finance.
The FCA’s proposed extension applies to all car finance commission complaints, rather than just DCAs. That suggests the regulator could broaden the scope of its review to include fixed commissions.
“I would be surprised if they don’t,” Gary Greenwood, an analyst at Shore Capital, told City AM. “A wider scope, by implication, means potentially higher compensation costs.”
The FCA is still considering whether the Court of Appeal’s decision will impact the timeline and scope of its review, it said on Wednesday.
Greenwood said that while the FCA’s proposed extension “provides operational breathing space” for motor finance firms, it also signalled risks to investor payouts.
The FCA urged auto lenders to use the extra time to “ensure they have the resources to issue final responses to complaints” and said firms would likely have to “consider whether they should make any financial provisions”.
“This could put a limitation on the ability of quoted firms with exposure to this matter to make distributions to shareholders in the near-term until greater clarity on this matter is provided,” Greenwood said.
Analysts at RBC Capital Markets have said they expect Lloyds to cut its £2bn share buyback programme in half this year thanks to the crisis. Lloyds declined to comment on the estimate.
The bank, which owns the UK’s biggest auto lender Black Horse, has already set aside £450m to cover potential costs tied to the FCA’s review.
Close Brothers and South African bank FirstRand, the lenders involved in last month’s test case, are expected to appeal the ruling. The FCA will write to the Supreme Court asking it to decide quickly whether it will hear the appeal given its potential impact on the market and consumers.
“The courts trump the regulator here, so as soon as the Court of Appeal handed down their decision, everything the regulator had previously told us in respect of their review of motor finance was subject to revision,” said Benjamin Toms, an analyst at RBC.
“This includes a potential definitional widening of ‘bad’ commissions, from discretionary only to encompass all commissions. All eyes now should be on the Supreme Court.”
Adrian Dally, of trade body the Finance and Leasing Association, told City AM last week that lenders have experienced heavy costs handling more than two million complaints since January.
Shares in Close Brothers, considered the most exposed bank to the FCA’s probe in relative terms, have cratered 49 per cent since the ruling. Its stock dropped to an all-time low on Wednesday.
Nikhil Rathi, the FCA’s chief executive, gave evidence to the House of Lords’ Financial Services Regulation Committee on Wednesday.
Tory peer Michael Forsyth, the committee’s chair, said the group would likely ask him back shortly for a separate session on motor finance “to consider what is a very important issue for the market”.