The current motor finance crisis is unlikely to reach the scale of the PPI scandal, though it may still impact banks' credit ratings, warns Fitch Ratings, a leading U.S. credit rating agency. Fitch cautions that this situation could carry "significant financial implications."
The agency has been closely monitoring developments since last month’s Court of Appeal decision, which has stirred concerns across the finance industry. According to Fitch, banks like Lloyds, Santander, and Barclays are best positioned to withstand the crisis due to their strong pre-impairment profits, robust capital reserves, and limited exposure to motor finance.
However, Fitch also notes that lenders’ credit ratings could face pressure if "remediation costs start affecting earnings, capital ratios, and growth over an extended period." The agency further warns that the recent court ruling "materially increases the likelihood" of a redress scheme to compensate affected customers, which could lead to notable financial burdens.
In its analysis, Fitch comments that while compensation costs from this crisis are unlikely to match those of the PPI scandal, UK banks may still feel the impact. With rising interest rates and contained impairment costs, most banks have maintained profitability in recent years, though future ratings may come under strain if compensation expenses affect long-term earnings and growth.
The ruling is also expected to lead to stricter regulatory oversight, prompting lenders to revise their agreements with brokers and dealerships to minimize legal risks and potential compensation liabilities.
Close Brothers has been the first lender significantly affected by the crisis, halting new business following the court's decision. Fitch has placed Close Brothers Group on "Rating Watch Negative," citing the lender’s high exposure to motor finance and relatively lower capacity to absorb losses. This comes after the Court of Appeal found that customer commissions were not properly disclosed, setting a precedent that could lead to substantial liabilities for motor finance lenders.
Other banks with exposure to motor finance—such as Bank of Ireland UK, Barclays, Lloyds Banking Group, Paragon, Santander UK, and Investec Bank—have not yet seen immediate rating changes but may face future scrutiny due to their involvement in the sector. The FCA’s ongoing investigation into historical discretionary commissions in motor finance adds another layer of uncertainty for these lenders.
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