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Investors in Britain’s motor finance industry slammed on the brakes last October when the Court of Appeals said it was unlawful for lenders to pay “secret” commissions. An unusual intervention by Chancellor Rachel Reeves has reduced the risk that the sector becomes a total write-off.
It is not hard to see why Reeves has asked for permission to get involved in the case. The Supreme Court in April will decide whether lenders should be on the hook for tens of billions of pounds in compensation for historic loan agreements, which they thought to be legal at the time.
That would spook investors, not least because it is only five years since the saga of mis-sold payment protection insurance ended up costing more than 10 times initial estimates. One £50bn bill could be seen as an aberration, but two in quick succession may start to look like a worrying trend. Even in heavily regulated sectors such as financial services, investors should be able to expect some level of consistency and predictability around the rules.
Banks, too, can argue that they need predictability in order to lend money. Most restarted lending a few days after the October ruling plunged the industry into confusion. But it is difficult to make long-term investment decisions if you live in fear that policies currently considered standard will be retrospectively punished 10 years down the road.
Reeves is hardly alone in worrying that squeezing banks too hard could hurt the economy. American lenders squealed after regulators proposed a package of tough new rules known as Basel III, arguing that they would be forced to tighten the lending spigots.
UK banks are still pricing in a hefty slug of risk. Shares in Lloyds Banking Group, which has the UK’s largest car loan book, trade roughly in line with where they were last October — underperforming less-exposed NatWest and Barclays, which climbed 15 per cent and 18 per cent respectively over the same period. Close Brothers, which has higher exposure relative to its overall balance sheet, has even more ground to make up.
It is still too soon to put the foot on the gas — the court will have the final say, and there is a good chance lenders will end up paying at least some level of compensation.
Still, the fact that the Treasury has even tried to intervene could be seen as a positive for the industry more broadly. Few politicians would have dared to defend banks as the PPI scandal was building in the wake of the financial crisis; Reeves’ efforts suggest she is serious about making financial regulation more focused on growth.
nicholas.megaw@ft.com
