FCA Widens Motor Finance Review, Posing New Risks for Lenders (CBG, LLOY)

The Financial Conduct Authority (FCA) has significantly expanded its review of the motor finance sector, a move that might expose lenders such as Close Brothers Group PLC and Lloyds Bank to a potential surge in compensation claims, possibly exceeding those from the Payment Protection Insurance (PPI) scandal.

Shareholders of both companies will be loathe to see the news, with Close Brothers share price (LON: CBG) down 76.44% on a YTD basis, where Lloyds' shares (LON: LLOY) are coming off a month of declines that has seen the stock fall 8.62%, and underperform it's peers.

Motor finance lenders are bracing for a new wave of scrutiny after the FCA's decision to broaden its investigation parameters to include all types of car finance deals with commission structures, dating from 2007 to 2021. Previously, the probe primarily targeted discretionary deals but has now been extended to cover non-discretionary loan arrangements as well. This change could implicate a wider array of agreements and, as a result, significantly increase the volume and value of potential claims against firms in the sector.

Industry experts have been closely monitoring the situation, with one broker estimating that the total compensation bill could hit £19 billion. However, given the FCA's latest actions to extend its scope, this figure is expected to climb substantially, raising concerns that the fallout may even outpace the notorious £50 billion PPI scandal that rocked the financial sector in previous years. The PPI scandal was characterized by widespread mis-selling of insurance products to customers who were either not informed about them or did not need them, leading to billions in compensation payouts. The motor finance claims could potentially mirror this situation in scale and financial impact.

In response to the growing concerns, the FCA has made the decision to push back its deadline, providing lenders with additional time to gear up for the anticipated influx of claims.

The potential increase in claims and the complexity of addressing them have naturally raised eyebrows among investors and market analysts.

The consequences for motor finance lenders could be considerable, not only in terms of financial payouts but also regarding the broader implications for the sector's regulatory practices and consumer trust. As the industry awaits further developments, the FCA's expanded review serves as a stark reminder of the importance of transparency and fairness in loan arrangements and the severe repercussions when these standards are not met. The coming months will be pivotal as companies and regulators navigate this complex and evolving landscape..