Motor finance compensation to ‘to fire starting gun’ on banking M&A
The financial watchdog’s long-awaited motor finance redress scheme is predicted to “fire the starting gun” on a wave of deals throughout the banking sector.
The Financial Conduct Authority (FCA) launched the final rules for its redress programme on Monday, with the bill for lenders expected to come in at just north of £9bn, down from previous estimates of around £11bn.
Whilst it skirts a £44bn hit once feared in the height of the scandal last year, the sum is still expected to have major consequences for the industry.
Hyder Jumabhoy, partner at White & Case, said the changes to the redress scheme would be “welcomed by the UK motor finance industry” but added it would have “significant implications for the sector”.
“With uncertainty now lifting, we expect this to fire the starting gun on a wave of M&A activity, as some lenders deploy excess provision amounts for acquisitions, while others take the opportunity to derisk existing loan portfolios.”
Billions of pounds have been placed in reserves for potential compensation hits, with Lloyds Banking Group – the owner of the UK’s largest motor finance lender Black Horse – on the hook for £2bn.
Could Close Brothers be a target?
Moody’s analysts Alessandor Roccati and Simon James Robin Ainsworth previously said Close Brothers – which has provisioned near £300m – could be snapped up as a result of motor finance woes.
The analysts said the firm could be “taken over if regulatory investigations into its motor finance business were to result in financial penalties that weakened its solvency”.
Ahead of the redress announcement, the bank was accused of “systematically” misrepresenting its exposure to the scandal and under-provisioning.
Short-seller Viceroy said in a “blue sky” scenario, Close Brothers could face regulatory intervention, while in its worst case the lender would need to be restructured — leaving shareholders “substantially wiped out”.
The bank said it “strongly disagrees” with the findings and said it “follows a robust governance process”.
Close Brothers has embarked on a cost-cutting mission in the last year, which has recently included the announcement of 600 jobs facing the chop.
In the six-months to the end of January 2026, deposits by customers reached £7.8bn. Whilst a tumble from £8.8bn in the previous half, any takeover would still mark a major move for the banking sector.
Banking juggernauts have eyed scaling up their market share with a series of takeovers of challenger banks completed over the last year.
Tesco Bank was acquired by Barclays for £600m and Natwest snapped up Sainsbury’s for approximately £1.4bn. In July, Santander snapped up high street lender TSB for £2.6bn.
Whilst the consolidation is tipped to continue Jumabhoy said the finalising of the motor finance scheme could “prompt” new international vehicle manufacturers entering the market “to steady the supply of finance for buyers of new vehicles”.
Numerous banks have exited the market and restructured their operations amidst the regulatory intervention. Santander has spun off its car finance division from the UK business and Secure Trust Bank revealed a “strategic pivot” away from the market.