Report: UK Car Loan Probe Could Hurt Banks

England’s financial watchdog is taking a long look at the way lenders financed car loans.

And that investigation could have broader implications for the country’s banking sector, Bloomberg News said in a report Sunday (Feb. 25). 

The Financial Conduct Authority (FCA) is reviewing commissions on car loans, which has caused British banks valuations to dip, said UBS analyst Jason Napier. 

For example, Lloyds, the largest auto financing lender in the U.K., last week set aside $570 million for possible compensation and other costs tied to the review.

According to the report, nearly 90% of new cars sold in the U.K. — in the days when interest rates were low and credit was “plentiful” — were made through financing deals. Dealerships could earn thousands for themselves and for banks by pushing up interest rates offered to customers, a practice called “discretionary commission arrangements.”

The FCA banned the practice in 2021, and has said this move saves consumers £165 million ($209 million) a year. But after getting a wave of complaints from customers who were sold these loans, the regulator is taking further action, reviewing loans that go back as far as 2007.

This review, coupled with rising interest rates and a drop in used car prices, might be bad news for banks, particularly those lending to less affluent customers, the report said. 

“In the pandemic, interest rates were low, people got loads of stimulus and delinquencies were very low too,” said Aidan Rushby, founder and chief executive officer of Carmoola, a London-based car finance firm. “Now we’re in a recession, delinquencies will go up and car prices will go down. This means some lenders will recoup less value when a borrower defaults.”

The situation is happening while consumers in the U.S. — particularly younger ones — are feeling increased stress due to their auto loans.

Recent data from the Federal Reserve showed that 4.8% of auto loans were in serious delinquencies for consumers 18 to 29 years old, compared to 4.3% last year. For consumers between aged 30 and 39, the delinquencies 90-plus days past due climbed from under 3% at the end of 2022 to 3.6% more recently.

Meanwhile, PYMNTS spoke this month with F&I Sentinel CEO Stephen McDaniel about the macro factors affecting the auto-financing ecosystem, and “the challenge lies in the patchwork of disparate and ever-evolving compliance rules” that differ across all 50 states.

“There might be several scenarios that spur a consumer to cancel a financing and insurance (F&I) product. They might simply change their mind about the product itself or may opt to pay off their finance agreements early,” PYMNTS wrote. “The consumer is entitled to an accurate refund — though the mandated time frames can vary from state to state.”

McDaniel said that legally, the auto finance company that funds the consumer’s loan along with the F&I products bought by the consumer bears the compliance risk for the F&I product.

That’s the case, he told PYMNTS, “even though the auto finance company had no part in creating the terms and conditions of the F&I product or how it was sold.”