Close Brothers and First Rand look to park motor finance row
After countless speed bumps, sharp handbreak turns and a fair few false starts, the two banks that took the motor finance scandal to the top finally look to put it in the rearview mirror.
Close Brothers and Aldermore owner First Rand have sought to wrap up the over two-year long saga after the financial watchdog laid out its final proposals for an industry wide redress scheme.
The Financial Conduct Authority (FCA) expects the banking industry’s motor finance bill to come in at just over £9bn after slimming the number of qualifying agreements to 12.1m from 14.2m.
Compared to the previous proposals outlined in October – where the industry united to deliver a major sucker punch to the watchdog – responses have varied.
Close Brothers has insisted it can “comfortably” absorb an estimated hit of £320m.
Meanwhile, First Rand is set to sell its UK challenger bank Aldermore following concerns about the redress. The South African lender has said the redress plan is “deeply flawed” and dampened its risk appetite for UK consumer finance. As such, provisions have soared to £750m, from £510m previously.
Close Brothers to patch wounds on bruised share price
The two banks were responsible for taking the legal battle to the Supreme Court last year where they were successful in overturning the Court of Appeal’s October ruling that the use of discretionary commission agreements (DCAs) – secret deals between car dealers and lenders that kept customers in the dark – was unlawful.
Both lenders – along with the rest of the industry – will be keen to wrap up the saga, which has dramatically weighed on firms’ market price tag since the initial flare up in 2024.
Close Brothers share price has been “beaten up” throughout the process, and still remains down around 40 per cent its January 2024 level.
But whilst lenders will be eager to kick their car finance headaches to the curb, a bus-load of uncertainties continue to threaten to upend any stability.
Questions remain over the potential of another legal battle – a notion many lenders have stopped short of ruling out. The FCA split the scheme into two in a move that has been viewed as the regulator bracing for legal challenges to deals still dating back to 2007 being eligible. Should this occur, compensation payments for the second scheme for deals post-2014 can continue without disruption.
A potential influx of omnibus claims also threatens to send ripples through the sector. Lloyds – which owns the UK’s largest motor finance lender Black Horse – is facing a court battle with some 30,000 borrowers who are poised to ditch the redress scheme.
Courmacs – one of the claims firms which has faced ‘ambulance chasing’ accusations throughout the saga – is gearing up to lodge a £66m claim on behalf of the customers who believe they were harmed by Black Horse deals.
But the uncertainty is a long way from the path that banks were staring down 12 months ago. Provisions still stand tall but with a decent amount of extra certainty and share prices remain reactive but trend in a more positive direction.
A second round in the legal arena threatens some of this standing, though banks can breathe a sigh of relief that it will not not have the £44bn of consequences hanging over it.
Close Brothers’ whopping stock rally on Wednesday suggests market sentiment is on the long drive into the sunset but the saga hasn’t been left in the dust quite yet.