Car financing crisis threatens home and car insurance – banks are on the hook for billions in ‘new PPI’
The crisis engulfing the car finance market could spread to other parts of the insurance industry, experts have warned.
The Court of Appeal ruled last month that commissions paid between banks and brokers on car deals could be unlawful because they were not clearly communicated to the customer.
The decision threw the auto finance industry into turmoil.
Shares in major lenders, including Lloyds, tumbled on fears they could face a bill similar to the £50 billion in costs and compensation they paid over the mis-selling of payment protection insurance (PPI), one of the biggest scandals ever. the banking sector.
Ruling: The Court of Appeal ruled last month that commissions paid between banks and brokers on car deals could be unlawful because they were not clearly communicated to the customer
The latest lawsuit concerns so-called ‘discretionary commission schemes’ used by the car finance industry before they were banned in 2021.
Close Brothers, one of Britain’s oldest commercial banks, has stopped making car loans while it considers an appeal to the High Court.
But analysts at investment bank RBC warn that if the Court of Appeal ruling is upheld, ‘lawsuits over motor finance could spread to other products such as premium finance’, where commissions are also paid by banks to intermediaries but are also not allowed to be made public .
The RBC report warned of the impact of the court’s decision, saying: ‘One possible interpretation is that the decision is broad enough to include any brokerage commission in any financial arrangement where the borrower has not given informed consent to the payment of the committee.’
Close Brothers already had to pay £390 million in customer payouts if it lost the car loan lawsuit, RBC calculated.
But the company has promised an additional £250 million in damages for the bank in the event of a ‘bad outcome’.
Car loans make up around a fifth of loans at Close Brothers – or almost £2 billion. But premium financing accounts for another tenth of loans, or £1 billion.
James Daley of consumer campaign group Fairer Finance said the court ruling could have “huge implications for the entire credit sector and potentially beyond”.
Banks were “quite angry,” he added, and “lobbied hard” for government intervention.
Premium financing means customers borrow money at high interest rates to spread the cost of their car or home insurance over monthly installments, rather than paying a one-off lump sum.
It is estimated that more than 20 million customers pay for their car and home insurance this way and more than three-quarters of adults in financial difficulty have used the product, according to City Watchdog, the Financial Conduct Authority.
Although much smaller than the £39 billion car finance market, premium finance loans exceeded £5 billion in 2022, generating up to £1.2 billion in revenue for providers, according to the FCA.
Auto insurance policyholders saw their premiums rise by an average of 25 percent last year, driven by inflation and rising insurance claims.
The regulator is investigating both premium and car financing because customers are concerned they are not getting fair or competitive deals.
Close Brothers was contacted for comment.
The company recently sold its asset management unit for £200m and scrapped dividend payments to shareholders in a bid to preserve capital.
The bank said the court ruling could lead to “significant liabilities”, but described its financial position as “strong”.
Close Brothers shares fell 2.5 per cent to 220.2p yesterday – a 30-year low.
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