Finance

UK car finance industry in crisis, with banks bracing for mega payouts

Published

6 months ago

November 14, 2024

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.

Mike Kemp | In Pictures | Getty Images

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.

Bloomberg | Bloomberg | Getty Images

“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.

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Berkshire Hathaway shares dip nearly 3% after shocking Buffett exit and an earnings decline

Published

17 hours ago

May 5, 2025

Business Finance News

People watch as Berkshire Hathaway chairman Warren Buffett is seen on a screen speaking at the Berkshire Hathaway Inc annual shareholders’ meeting, in Omaha, Nebraska, U.S., May 3, 2025.

Brendan McDermid | Reuters

Berkshire Hathaway shares are hanging on solidly Monday as investors process Warren Buffett‘s surprise announcement to step down and envision a new path for the conglomerate after his legendary 60-year run.

Buffett, 94, picked the very last moment at Berkshire’s annual meeting in Omaha, Nebraska, to tell his loyal shareholders that it’s time for Greg Abel, vice chairman of non-insurance operations, to replace him as CEO. The board voted unanimously on Sunday to make Abel president and CEO on Jan. 1, 2026, and for Buffett to remain as chairman.

Class B shares fell 2.9% in premarket trading Monday after hitting an all-time high at $539.80 Friday. Class A shares dropped 2.8% after closing at a record high at $809,350 apiece. Berkshire issued Class B shares in 1996 at a price equal to one-thirtieth of a Class A share. In 2010, Berkshire Class B shares split 50-for-1.

“Shareholders should welcome this transparent transition, but also have confidence that Warren isn’t going anywhere,” said Macrae Sykes, portfolio manager at Gabelli Funds and a Berkshire shareholder. “Retaining the position of Chairman means he can continue to mentor Greg and the Berkshire leaders, while also providing additional intellectual capacity when the inevitable time for more major capital allocation occurs.”

It marks an end of an epic era for Berkshire, which was a failing New England textile mill six decades ago when Buffett used an investment partnership he ran to take control. Berkshire has grown into a one-of-a-kind juggernaut worth nearly $1.2 trillion with businesses encompassing insurance, railroad, retail, manufacturing and energy. Buffett is handing over his reins on a particularly high note as Berkshire shares just reached a new peak Friday.

Berkshire Hathaway Class B shares

“Buffett leaves a company that is less reliant on his investing capabilities, with an array of leading businesses with strong cash flows,” Brian Meredith, UBS’ Berkshire analyst, said in a note. “Operationally, we expect little change at BRK and the culture/strategy to remain unchanged under Abel.”

The stock could also be reacting to Berkshire’s first-quarter results that showed a 14% decline in operating earnings, driven by a 48.6% plunge in insurance-underwriting profit. Berkshire said the Southern California wildfires led to a $1.1 billion loss during the period.

Berkshire shares have significantly outperformed the S&P 500, rising nearly 19% this year. Investors seeking relatively safe places to hide find Berkshire appealing because of the defensive nature of its huge insurance empire and the conglomerate’s unmatched balance sheet.