By Kirstin Ridley LONDON, March 31 (Reuters) - A 9.1 billion pound ($12 billion) British compensation plan for mis-sold car finance could trigger legal challenges by lenders, analysts said on Tuesday,
UK Lenders Expected to Challenge $12 Billion Car Finance Redress Scheme
Overview of the UK Car Finance Redress Scheme and Industry Response
By Kirstin Ridley
LONDON, March 31 (Reuters) - A 9.1 billion pound ($12 billion) British compensation plan for mis-sold car finance could trigger legal challenges by lenders, analysts said on Tuesday, even though the Financial Conduct Authority narrowed its scope and raised eligibility thresholds.
The bill for one of Britain's biggest mis-selling scandals was cut on Monday from a mooted 11 billion pounds and the final cost hinges in part on reduced administrative costs, policy tweaks and lower forecasts for motorist participation.
Potential Legal Challenges and Delays
"It is highly likely that at least one, if not multiple, of the many interested parties will ask the administrative courts to review the scheme," RBC Capital Markets analysts said.
Any legal challenges would delay consumer payouts.
FCA Accusations and Industry Practices
The FCA has accused the industry of inadequately disclosing commissions and contractual ties between lenders and car dealerships that it says encouraged brokers to hike interest rates on consumer loans between 2007 and 2024.
Shore Capital said FCA estimates that 75% of eligible motorists would opt in, rather than an originally forecast 85%, were a "key uncertainty".
Banking Sector Impact
Bank Shares and Provisions
BANK SHARES FIRM AS INDUSTRY DIGESTS PLAN
Banks including Lloyds, Santander, Barclays, Close Brothers and the finance arms of vehicle manufacturers have collectively set aside billions of pounds for compensation.
UBS analysts said the scheme appeared not to substantially worsen the outlook for total costs, while other analysts said many lenders had likely provisioned sufficiently.
RBC Capital Markets, however, said its "best guess" was that banks might have to top up provisions by around 25%.
FCA Adjustments and Market Reactions
After fierce pushback from the industry and consumer groups, the FCA now estimates that banks will shoulder 57%, rather than 51% of the scheme's impact, albeit with a reduced liability of 5.2 billion pounds rather than 5.6 billion pounds, analysts said.
But with limited detail on their individual exposures, analysts are awaiting updates from the lenders and bank stocks rose on Tuesday as markets digested Monday's FCA statement.
Bank and Lender Responses
Lloyds and Close Brothers said that they were assessing the impact of the package, which still applies to deals with inadequate disclosure of discretionary commission arrangements, where higher interest rates could secure a higher commission.
The FCA has also modestly raised the threshold for high-commission arrangements and excluded the finance arms of vehicle manufacturers that can prove visible links between the lender, manufacturer and franchised dealer from liability.
That helped reduce the number of loan agreements eligible for compensation to 12.1 million and increased the average redress per agreement to 829 pounds.
Next Steps and Timeline
The FCA has said payouts should start this year, pending legal challenges.
($1 = 0.7570 pounds)
(Reporting by Kirstin Ridley; Editing by Tommy Reggiori Wilkes and Alexander Smith)
