The deepening car finance crisis could deliver a major blow to Britain’s economic prospects, according to the head of the country’s largest retail bank.
Charlie Nunn, chief executive of Lloyds Bank, warned that uncertainty caused by recent court rulings was undermining investor confidence and risking a multi-billion-pound claims storm reminiscent of the PPI scandal.
Mr Nunn’s concerns follow a landmark Court of Appeal ruling which deemed hidden commissions paid to car salesmen by banks as illegal. The judgment, handed down last month, has effectively overturned a longstanding industry practice and appears to contradict guidance previously issued by the Financial Conduct Authority (FCA). The court’s decision that sales staff have a “fiduciary duty” to secure the best deal for consumers has raised the prospect that similar claims could spread beyond car finance into other areas of consumer lending.
Speaking at an event hosted by the Financial Times, Mr Nunn said: “Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation … is bleeding across the whole economy.” He suggested that the uncertainty stemming from the ruling, combined with regulatory indecision, was making it harder for foreign and domestic investors alike to commit funds to UK financial services and the economy more broadly.
The fallout is expected to be costly. Industry observers have likened the situation to the payment protection insurance (PPI) scandal, which inflicted tens of billions of pounds in redress on UK lenders. Preliminary estimates suggest that motor finance compensation could top £16 billion, with some claims management firms warning of as much as £40 billion in potential payouts.
The crisis is already starting to bite. Lloyds, which entered the market through its Black Horse subsidiary, took a £450 million provision earlier this year in anticipation of compensation claims. Close Brothers, another major motor lender, has seen its market value collapse from £1.5 billion to just £325 million since the issue intensified, as lenders pull back and assess the legal risks.
The timing of the Court of Appeal’s judgment complicates an ongoing FCA investigation into mis-selling within the motor finance industry. While the Financial Ombudsman Service broke ranks with the FCA last year to support consumer claims, the regulator’s own inquiry and any subsequent compensation scheme are not expected to conclude before mid-2025. In the meantime, many companies remain in limbo, wary of lending to potential car buyers until the legal landscape becomes clearer.
About 85 per cent of new cars and 65 per cent of second-hand vehicles in the UK are purchased using finance arrangements, making the issue a critical one for the automotive and banking sectors alike. Should consumer credit costs rise or product availability falter, the consequences could ripple across dealerships, lenders, and manufacturers, hindering the post-pandemic recovery of Britain’s automotive market and wider economy.
Mr Nunn stressed that only coordinated action could restore the faith of the global investment community. “Financial services, regulators, and the Government are going to need to come together to provide that certainty for consumers, for the car industry, and actually for investability in the UK economy,” he said.
As lenders weigh up the implications and seek a path forward, the stakes could not be higher. With Britain striving to attract capital and reaffirm its place in global markets, the outcome of the car finance crisis may well serve as an indicator of the country’s long-term regulatory stability and economic resilience.