Some of the largest banks in the UK may have to pay billions of pounds to consumers over contentious lending practices at car dealers.
In response to an October judgement by the UK’s Court of Appeal, many British banks are considering halting auto lending entirely. The court ruled it was unlawful for car dealerships to receive bonuses from auto lenders without getting the customer’s informed consent.
UK financial institutions were not expecting the ruling and are now petitioning for clarity from the country’s regulators. These banks argue that they were following the guidelines that were in place at the time and maintain that they did not engage in deceptive practices.
“Auto financing has operated like this in the U.S. for years, where banks pay commissions to dealers for originating auto loans on their behalf,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “The Finance and Insurance function at a car dealer is where you go to sign the docs and get the sales pitch on the extended warranty, upholstery Scotchgard, and all of the other stuff that dealers make money on.”
“In fact, most dealers make more on F&I than they do on the actual vehicles,” he said. “If Bank A pays the dealer a higher commission on loans than Bank B, the dealer may steer customers into loans from Bank A, even if the rates and terms to consumers are not as favorable as Bank B. This is not illegal in the U.S., if the rates and terms are clearly disclosed to the consumer, but dealers aren’t required to disclose their commission arrangements with banks.”
Injecting Uncertainty
UK auto dealers and banks had been operating under a similar model until the October ruling introduced uncertainty into the industry. According to CNBC, the UK’s Financial Conduct Authority said it would work to expedite a decision from Britain’s Supreme Court on whether lenders could appeal the decision.
The FCA, a consumer watchdog group similar to the U.S. Consumer Financial Protection Bureau, has indicated it might get involved if the appeal is approved. However, the FCA still advised UK auto lenders to set aside funds for potential consumer reimbursement. If the ruling stands, not only will the FCA need to revise its consumer disclosure rules, but banks could also face legal action.
Widespread Ramifications
The potential impact on UK financial institutions has been estimated at up to £28 billion, and it could prompt many lenders to exit the market entirely. There are also concerns that the precedent set by the ruling could have widespread ramifications for other forms of consumer lending in the country.
“Banks are saying they followed the FCA rules, which are not aligned with the court’s ruling,” Apgar said. “Courts can certainly overturn rules and force changes, but it doesn’t seem likely that banks will be held responsible to consumers for following the FCA rules that were in effect at the time the loans were originated.”
