View looking towards the Royal Exchange and in the City of London where the glass architecture of the tower 22 Bishopsgate disappears into mist on 6th November 2024 in London, United Kingdom.
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Britain’s motor finance industry is in disarray, with analysts warning of worst-case scenarios similar in magnitude to the country’s costliest consumer banking scandal.
The burgeoning crisis stems back to a landmark judgement from the U.K.’s Court of Appeal in late October, when the court ruled it was unlawful for car dealers to receive bonuses from banks providing motor finance — without getting the customer’s informed consent.
The decision caught many in the motor finance industry off guard and appears to have paved the way for a multi-billion-pound redress scheme to compensate consumers.
It has prompted comparisons to Britain’s payment protection insurance (PPI) scandal, which was estimated to have cost banks more than £50 billion ($63.8 billion) and is regarded as the biggest mis-selling scandal in the country’s financial services history.
Britain’s Financial Conduct Authority, the country’s financial watchdog, said on Wednesday that it will write to the Supreme Court to expedite a decision over whether to give lenders the green light to appeal the ruling.
Banks left ‘in limbo’
The FCA, which noted that car financing groups were likely to have received a surge in complaints in recent weeks, said that it would consider intervening “to share its expertise” if permission to appeal is granted.
It urged motor finance groups to consider setting aside financial provisions to resolve the high volume of complaints.
Niklas Kammer, equity analyst at Morningstar, said Britain’s banks have been left in “in limbo” since the Oct. 25 court ruling, with Lloyds thought to be the most at risk through its Black Horse business. Barclays also has some exposure, Kammer said, “but meaningfully less.”
A Lloyds Banking Group Plc bank branch in London, UK, on Monday, Oct. 21, 2024.
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“I think it is fair to say that the ruling by the Court of Appeal came as a surprise to the banks as well as the FCA. According to the banks, they followed the rules and guidelines set by the FCA, which are not aligned with the new Court of Appeal ruling,” Kammer told CNBC via email.
“As such, there exists significant uncertainty which set of rules banks have to abide by. The FCA has said that it will await the outcome of a potential Supreme Court ruling before taking a decision on the matter,” Kammer said.
“If the ruling stands, the FCA will have to change its rules on disclosures. Initially, the FCA pointed out that the matter should not take similar proportions to the PPI mis-selling, but should the new ruling stand, worst case scenarios do come close to the same magnitude in impact.”
Lenders ‘likely to pull out of the market’
Benjamin Toms, U.K. banks analyst at RBC Capital Markets, said that if the Supreme Court upholds the lower courts verdict, the downside impact for the motor finance sector, which includes both banks and non-banks, could be as much as £28 billion.
“Some lenders are likely to pull out of the market, which will mean less choice and higher prices for those looking to buy a vehicle,” Toms said.
“There is also the potential for legal creep, with other types of lending like premium finance also coming under the spotlight,” he added.
London Taxis wait in a queue at a taxi rank outside Fenchurch Street Station on October 14, 2024 in London, United Kingdom.
John Keeble | Getty Images News | Getty Images
In January, the FCA launched a review into the motor finance industry to probe whether there was widespread misconduct related to discretionary commission arrangements, or DCAs, before they were banned in 2021.
It said on Wednesday that it is currently considering the impact of the Court of Appeal’s judgement on its review.
Fitch, an influential rating agency, warned earlier this month that it had placed the ratings of Close Brothers Group on “Rating Watch Negative” due to the lender’s “high exposure” to motor finance.
Other lenders that have been “significantly involved” in motor finance lending include Barclays, Investec, Lloyds and Santander UK, Fitch said.
Lloyds, Britain’s largest car finance business, has set aside £450 million in financial provisions.
Federal Reserve Chairman Jerome Powell said Thursday that strong U.S. economic growth will allow policymakers to take their time in deciding how far and how fast to lower interest rates.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said in remarks for a speech to business leaders in Dallas. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
In an upbeat assessment of current conditions, the central bank leader called domestic growth “by far the best of any major economy in the world.”
Specifically, he said the labor market is holding up well despite disappointing job growth in October largely that he attributed to storm damage in the Southeast and labor strikes. Nonfarm payrolls increased by just 12,000 for the period.
Powell noted that the unemployment rate has been rising but has flattened out in recent months and remains low by historical standards.
On the question of inflation, he cited progress that has been “broad based,” noting that Fed officials expect it to continue to drift back towards the central bank’s 2% goal. Inflation data this week, though, showed a slight uptick in both consumer and producer prices, with 12-month rates pulling further away from the Fed mandate.
Still, Powell said the two indexes are indicating inflation by the Fed’s preferred measure at 2.3% in October, or 2.8% excluding food and energy.
“Inflation is running much closer to our 2 percent longer-run goal, but it is not there yet. We are committed to finishing the job,” said Powell, who noted that getting there could be “on a sometimes-bumpy path.”
The remarks come a week after the Federal Open Market Committee lowered the central bank’s benchmark borrowing rate by a quarter percentage point, pushing it down into a range between 4.5%-4.75%. That followed a half-point cut in September.
Powell has called the moves a recalibration of monetary policy that no longer needs to be focused primarily on stomping out inflation and now has a balanced aim at sustaining the labor market as well. Markets largely expect the Fed to continue with another quarter-point cut in December and then a few more in 2025.
However, Powell was noncommittal when it came to providing his own forecast. The Fed is seeking to guide its key rate down to a neutral setting that neither boosts nor inhibits growth, but is not sure what the end point will be.
“We are confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent,” he said. “We are moving policy over time to a more neutral setting. But the path for getting there is not preset.”
The Fed also has been allowing proceeds from its bond holdings to roll off its mammoth balance sheet each month. There have been no indications of when that process might end.
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Federal Reserve Chair Jerome Powell speaks Thursday to business leaders in the Dallas-Forth Worth area on monetary policy. Powell is delivering a speech followed by a question and answer session.
The appearance comes one week after policymakers again voted to lower their key interest rate by a quarter percentage point, or 25 basis points. That followed a half-point cut in September and left the federal funds rate in a range between 4.5%-4.75%.
Economic readings this week, though, showed that inflation has proven sticky, with consumer price inflation at 2.6% and prices at the wholesale level at 2.4%. The measures are considerably higher for core inflation, which excludes food and energy costs.
Markets expect the Fed to cut again in December then likely skip the January meeting as officials assess the impact of the policy easing moves so far.
Check out the companies making headlines in midday trading: Disney — The media stock popped 7% on stronger-than-expected earnings and guidance, aided by growth in its streaming business. The company said it expects high-single-digit adjusted earnings growth in fiscal 2025. Capri , Tapestry — Both luxury apparel stocks rose after the companies called off their planned merger , citing regulatory hurdles. Shares of Tapestry jumped nearly 13%, while Capri added 2.5%. Hims & Hers Health — The telehealth stock dropped 14% after Amazon revealed Prime users can now access fixed pricing of treatment for conditions such as men’s hair loss. The offering puts the company in direct competition with Hims & Hers Health. Super Micro Computer — The artificial intelligence server stock slumped more than 6% and headed for its fifth straight losing session. The company said this week that it delayed the filing of its report for the period that ended Sept. 30 . Shares are down 22% since the start of the week and 34% since the start of November. ASML Holding — Shares popped 5% after the Dutch semiconductor equipment maker maintained its 2030 targets at its 2024 Investor Day, driven by AI and other critical industry trends. Cisco Systems — The cybersecurity stock fell 1.9%. The company topped Wall Street’s quarterly estimates and raised its full-year guidance, but posted its fourth consecutive quarter of declining revenue. Revenue in the prior quarter fell 6% year over year. Charles Schwab — Shares of the brokerage firm gained 3.6%. Charles Schwab said total client assets hit $9.85 trillion in October, representing a 39% year-over-year increase. Norfolk Southern — Shares of the railroad operator fell 1% after reaching a settlement with activist Ancora to avoid a proxy fight. American Airlines — The airline stock rose more than 3% after Barclays upgraded shares to equal weight from underweight, citing an improving business travel setup and better credit card agreements. Campbell Soup — Shares gained more than 1% after Piper Sandler upgraded the consumer staples company to an overweight rating, citing a promising growth outlook due in part to its recent acquisition of sauce maker Rao’s. Ibotta — Shares of the digital rewards platform sank more than 16% on disappointing fourth-quarter guidance. Ibotta said it expects fourth-quarter revenue to range between $100 million and $106 million, versus a FactSet estimate of $110.3 million. CNH Industrial — Shares rose more than 6% after Greenlight Capital’s David Einhorn revealed at CNBC’s Delivering Alpha conference that he took a medium-sized position in the agricultural equipment company. Advance Auto Parts — The auto parts provider popped 6.3% after announcing plans to close more than 500 corporate stores and 200 independent locations. It also plans to shutter four distribution centers. — CNBC’s Jesse Pound, Pia Singh, Alex Harring, Hakyung Kim and Sean Conlon contributed reporting.