Car Finance Crisis Poses Threat to UK Economy, Warns Lloyds Bank CEO

The deepening crisis in Britain’s car finance sector could have serious implications for the country’s economic prospects, according to Charlie Nunn, CEO of Lloyds Bank. Nunn expressed concerns that uncertainty following recent court rulings is undermining investor confidence, risking a multi-billion-pound claims storm reminiscent of the Payment Protection Insurance (PPI) scandal.

Nunn’s remarks followed a landmark ruling by the Court of Appeal last month, which declared that hidden commissions paid to car salespeople by banks were illegal. This decision has overturned a longstanding industry practice and challenges previous guidance issued by the Financial Conduct Authority (FCA). The court’s ruling, which states that sales staff have a “fiduciary duty” to secure the best deal for consumers, could set a precedent for similar claims in other areas of consumer lending.

At a Financial Times event, Nunn explained: “Investors are looking at this and saying this principle of the courts coming up with decisions independently from the regulation… is bleeding across the whole economy.” He suggested that the uncertainty caused by the ruling, combined with regulatory indecision, is making it more difficult for both foreign and domestic investors to commit funds to the UK’s financial services sector, and by extension, the broader economy.

The potential fallout from the court’s decision is expected to be substantial, with some industry analysts drawing comparisons to the PPI scandal, which resulted in tens of billions of pounds in compensation payouts to consumers. Preliminary estimates suggest that compensation for the car finance issue could reach £16 billion, with some claims management firms predicting figures as high as £40 billion.

Lloyds, which entered the motor finance market through its Black Horse subsidiary, has already set aside £450 million in provisions for compensation claims. Close Brothers, another significant player in the sector, has seen its market value drop dramatically, from £1.5 billion to just £325 million, as lenders reassess their exposure to the legal risks.

The timing of the Court of Appeal’s judgment complicates an ongoing FCA investigation into mis-selling in the motor finance industry. While the Financial Ombudsman Service has supported consumer claims, the FCA’s own inquiry and any potential compensation scheme are not expected to conclude until mid-2025. As a result, many companies remain cautious about lending, waiting for greater clarity on the legal landscape.

With 85% of new cars and 65% of second-hand vehicles in the UK purchased using finance arrangements, the situation has become critical for both the automotive and banking sectors. Should consumer credit costs rise or availability decrease, it could hinder Britain’s post-pandemic recovery in the automotive sector and the wider economy.

Nunn emphasized the need for coordinated action to restore investor confidence, urging financial services, regulators, and the government to collaborate in providing certainty for consumers and the car industry. He stated, “Only together can we provide that certainty for consumers, for the car industry, and actually for investability in the UK economy.”

As lenders navigate the evolving situation, the resolution of the car finance crisis could have far-reaching implications for the UK’s economic stability and regulatory future.