Lloyds boss warns motor finance scandal threatens UK economy after FCA ruling

Lloyds Banking Group's chief executive, Charlie Nunn, has warned that the controversy surrounding now-prohibited motor finance deals could pose a threat to the UK economy.

Speaking at the Financial Times’ Global Banking Summit, Nunn stated that the shock court ruling in October over 'secret' car loan commissions "creates an investability problem" for Britain’s wider consumer finance sector, as reported by City AM.

The motor finance industry was shaken when senior judges ruled that a lender could not pay commission to a motor finance broker without obtaining the customer’s fully informed consent. This ruling has increased the likelihood of the Financial Conduct Authority (FCA) implementing a multibillion-pound redress scheme as part of its review of the so-called discretionary commission arrangements, which were banned in 2021.

"The level of uncertainty means we just don’t know what it’s going to mean yet," said Nunn. "We have a legal decision, a Court of Appeal decision, that is at odds with the last 30 years of regulation. And the uncertainty that creates in our environment is unique, it’s very different from other economies in the world."

Since the ruling, Lloyds’ share price has dropped 14 per cent.

It is considered the most exposed bank to the FCA’s review, owning the UK’s biggest auto lender Black Horse. In February, Lloyds set aside £450m to cover potential costs from the probe, although analysts at RBC have estimated that it could take a total profit hit of up to £3.9bn.

Nunn contended that motor finance is "a really important part of the British economy", with 85 per cent of people borrowing to buy a new car and roughly 60 per cent for second-hand cars. He further stated that the prevailing uncertainty made it challenging for Lloyds’ own investors "to have the confidence to provide us the capital" to make consumer finance a "thriving industry".

"I’ve met over 100 investors in the last few weeks, and investors are telling us that they’re really concerned about the uncertainty this creates on that sector, on the financial sector, and the UK more broadly," Nunn expressed. Legal experts have suggested that October’s ruling could establish a precedent for other areas of consumer finance beyond car loans.

Close Brothers and South African bank FirstRand, the lenders involved in the test case, have announced their intention to appeal the ruling to the Supreme Court. "Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation, which is then having a significant retrospective lookback, is already bleeding across the whole economy," Nunn commented.