Uncertainty persists beneath the hood of motor finance sector, according to recent reports
In the ever-evolving world of finance, the UK banking sector is experiencing a significant shake-up. The recent Supreme Court ruling in a motor finance case has brought about a wave of changes, with potential takeovers, consolidation, and repercussions for various banks.
The Supreme Court's decision to uphold the appeals of Close Brothers and First Rand has averted a potential £44bn liability for the two banks, offering a breath of relief in the industry. This ruling comes amidst a year of buyout bonanza in retail banks, signalling a potential acceleration in consolidation.
Analysts have been quick to predict more consolidation in the sector, following Santander's recent acquisition of high street bank TSB. Lloyds, Santander, Barclays, and Close Brothers have each set aside provisions for potential payouts related to a redress scheme, with Lloyds reserving the highest figure at £1.2bn.
The Financial Conduct Authority (FCA) is planning to consult on an industry-wide redress scheme, with estimated costs ranging between £9bn and £18bn. This scheme, which covers agreements going back to 2007, has raised concerns among analysts and industry leaders. Stephen Haddrill, director general of the Finance & Leasing Association, has expressed concern over the impractical timeframe of the redress scheme. John Phillipou, the association's chairman, has also criticised the potential compensation dating back nearly two decades, stating it would harm the UK's "investability".
The FCA's ruling could have significant implications for the UK motor finance industry, according to Hyder Jumabhoy, partner at White & Case. Jumabhoy suggests that the ruling might accelerate mergers and acquisitions in the sector due to decreased risk appetite and unused provision amounts becoming available for acquisitions.
The potential consolidation is not limited to the motor finance sector. Analysts expect a significant consolidation in the motor finance and automotive supplier sector, driven by the ongoing crisis and efficiency needs. Mergers and acquisitions aimed at increasing market dominance, such as the example of the merger between Schaeffler and Vitesco, are likely to become more prevalent.
The redress scheme and the potential consolidation trend are not without their challenges. Andy Nelson, head of UK banking and financial markets at NTT Data, has stated that the ruling is a warning and banks can't afford to be complacent. As the details of the redress scheme are ironed out, banks will need to carefully manage their provisions and adapt to the changing landscape.
In the midst of this, Lloyds remains relatively unfazed, with the bank stating that it does not expect a "material" impact from the redress scheme and will update its provision "as and when necessary". Analysts at RBC Capital Markets have projected that Lloyds would be liable for £1.6bn in a base case scenario, while Santander's potential liability would climb to £746m and Barclays' to £216m.
As the UK banking landscape prepares for potential consolidation, it remains to be seen how the sector will navigate these changes. One thing is certain: the banks will need to remain vigilant and adaptable in the face of these challenges.
