The recent announcement by the City regulator to review historical commission arrangements in the motor finance market has stirred considerable uncertainty and concern among industry players. This move, following the ban on discretionary commissions in 2021, has sparked a wave of apprehension about potential regulatory actions and their implications.
The news has sent shockwaves through the UK’s motor finance community, triggering discussions and debates about the potential fallout. While it’s unlikely that any resulting compensation costs will reach the staggering levels seen in the payment protection insurance (PPI) mis-selling scandal, which exceeded £50 billion, the impact on UK banks’ earnings will raise concern. Analysts have pegged the potential remediation costs for the motor finance sector at up to £16 billion, a figure widely circulated in the finance press.
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For major banks, like Lloyds and Santander, with robust profitability providing insulation against significant financial repercussions the impact will be manageable. However, the situation is more nuanced for mid-tier banks and specialist providers caught in the regulatory crosshairs. With the spectre of potentially large remediation on the horizon, these players are left grappling with uncertain outcomes and the prospect of financial strain.
In response to this climate of uncertainty, several financial institutions have begun fortifying their balance sheets in preparation for potential regulatory action. Following Black Horse’s decision to allocate £450 million to brace for the FCA probe, Close Brothers has announced £400 million in cost-cutting measures to bolster its financial position.
Meanwhile, Investec is poised to make a comparable announcement when it releases its annual results in May. Bloomberg reported that Investec Plc CEO Fani Titi stated that the bank anticipates profits for the fiscal year ending in March to range between £866.9 million and £909.6 million, representing an increase from the £818.7 million reported in the same period the previous year. Titi noted, “The results are quite strong even after factoring in a provision. We remain confident in our compliance, despite the ongoing investigation. We have assessed various potential outcomes and, as a precautionary measure, made a provision.”
Close Brothers faces unprecedented challenges amid FCA Motor Finance Review
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