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The writer is the author of several books on the City and Wall Street
“This sector is the crown jewel in our economy,” chancellor Rachel Reeves told a City audience at this month’s Mansion House dinner. Crown jewel or not, the UK financial services industry still has an ability to deliver nasty surprises. The recent Court of Appeal motor loans judgment poses awkward questions for the sector, its regulators and the government’s pro-City approach.
The court has ruled that car dealers must disclose commission received on motor loans upfront and openly. Burying such information in the small print is not sufficient.
Until discretionary commission arrangements were banned in 2021, many banks incentivised motor dealers to charge customers very high borrowing rates. Subject to appeal, this could leave banks, for whom dealers were acting as credit brokers, facing a compensation bill that analysts estimate could reach £30bn.
What should concern a deregulating government is that the industry has form on this. Incentives were once used in another dark corner of consumer banking: payment protection insurance. This mis-selling scandal was settled in the 2010s at a cost to banks of over £50bn. It is astonishing that banks paying out for incentive-driven mis-selling might also have been incentivising brokers to charge whatever they could get away with in another part of the business.
The industry says times have changed since the PPI scandal. But the sector’s reaction to last month’s motor finance judgment suggests market practice still lags behind the court’s common law, common sense interpretation. Santander delayed its UK results to consider the implications and then set aside £295mn Specialist Close Brothers warned of significant potential liabilities. Market leader Lloyds, which paid a PPI bill of almost £22bn, implied it would re-examine its £450mn car loans provision and suspended commission payments to car dealers.
The Financial Conduct Authority, which applied a lower level of guidance on disclosing commissions, said that it would consider the court’s decision carefully. And well it might. In 2023, after a lengthy consultation, it imposed a new Consumer Duty — rules it claimed set “high standards of consumer protection across financial services and requires firms to put their customers’ interests first”. Customers should ask whose interests were being put first prior to this. They should also question why guidance from a regulator fell short of the court’s interpretation.
In fairness to the FCA, it was receiving mixed messages from the previous government when the consumer duty rule was laid down. The industry lobbied hard against it, while the then City of London minister criticised it on the grounds it would damage the industry. The present government evidently shares this view. It followed the Mansion House dinner with reforms to the compensation process that look distinctly industry friendly.
The FCA has a tightrope to walk. It must combine its objectives of promoting the industry’s growth with firm regulation. Balance is difficult to achieve. The country found this out to its cost when the last Labour government’s “light touch regulation” policy left the UK overexposed to the global financial crisis. Just a year earlier, then chancellor Gordon Brown told another Mansion House audience that “Britain needs more of the vigour, ingenuity and aspiration that you already demonstrate”.
At present, consumer interests are more of a flashpoint than financial stability. But danger remains. Much depends on regulators and the industry learning from their past mistakes.
Principal responsibility falls on the industry. In 2023 it quietly dissolved its Financial Standards Culture Board, a voluntary post-crisis gesture towards changing behaviour. But the Court of Appeal judgment is a reminder that when it comes to culture, the sector cannot relax.
Regulatory relief is only ever a short-term fix. Boards need to focus on customer value before shareholder value. The first leads to the second, not vice versa. Right now, for example, they are presumably asking where else besides motor loans might businesses be burying important disclosures in the small print? It could be a very long query.
Until the culture changes, the financial services industry will remain vulnerable to legal action and expensive restitution settlements. These damage share ratings and raise the cost of capital.
It is in everyone’s interests — banks, customers, investors and the government’s growth agenda — that the sector gets this right.