Major lenders at risk, according to Fitch, as trouble looms
Lenders across the UK, including major names like Lloyds, Santander, and Barclays could face a downgrade in their credit ratings following a recent court decision highlighting troubling commission practices. This Court of Appeal ruling has opened the door to significant legal and financial consequences for lenders, putting billions of pounds at stake and shaking investor confidence in the sector.
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The controversy centres on the commissions banks pay to brokers and car dealerships for arranging vehicle loans. In many cases, customers were reportedly unaware of these commissions, creating a "conflict of interest" as brokers pushed for deals that maximized their earnings rather than serving borrowers’ best interests. The court ruling noted that this lack of "informed consent" could lead to substantial compensation claims.
Fitch Ratings has already reacted to the potential fallout, placing some lenders under “rating watch negative”. This implies a possible downgrade for major players, which stand to face substantial liabilities if similar claims proceed. While Fitch does not anticipate compensation levels reaching the scale of the notorious PPI scandal, in which UK banks paid over £38 billion in compensation, estimates suggest the motor finance sector could face up to £13 billion in claims.
Shares in Lloyds Banking Group dropped over 7% following the court ruling, marking a sharp reversal for the bank, which had recently benefited from improved financial performance. Meanwhile, Close Brothers, deeply embedded in the motor finance sector, saw its stock lose a quarter of its value. Responding to the court decision, Close Brothers announced a temporary suspension of new motor finance deals in the UK, a move signalling the company’s intention to mitigate potential losses as it appeals the verdict.
The Financial Conduct Authority (FCA) is also on alert. Earlier this year, it launched an industry-wide review of commission practices dating back to 2007 in response to a growing number of consumer complaints. With a final report anticipated in May 2025, the FCA’s findings could prompt additional regulatory measures, setting new compliance expectations for transparency and customer protections across the motor finance industry.
The recent ruling underscored how car dealerships and brokers structured loan arrangements, often relying on a “difference in charge” (DIC) model to inflate interest rates. This practice incentivised brokers to offer higher-interest loans to boost their commission earnings, sometimes leading to charges that covered as much as 70% of a loan’s interest rate. Such practices could now lead to widespread claims, as affected customers allege they were misled by brokers acting as credit intermediaries.
Lloyds, one of the largest motor finance providers in the UK, is already preparing for the potential impact, having allocated £450 million to cover possible compensation claims. Meanwhile, Santander has delayed its upcoming quarterly results to assess the ruling’s financial implications, and Investec has reserved £30 million for similar contingencies. These actions highlight the pressure on major lenders to adjust their practices and prepare for potential regulatory shifts in light of the court decision.
Close Brothers and MotoNovo Finance, a subsidiary of FirstRand Ltd, were the primary defendants in the court case. Both firms were found to have inadequately disclosed broker commissions, which created financial conflicts and compromised borrower trust. Close Brothers, a long-standing specialist in motor finance, will now have to manage reputational risks and assess its future operations in the UK motor finance market. MotoNovo, partnering with a network of car dealerships, faces scrutiny as well, as brokers may have pushed high-interest loans without fully informing customers of associated costs.
Financial experts are warning that the impact of the ruling could ripple across the industry, leaving banks vulnerable to additional claims. Citigroup analysts suggest that the total compensation bill could potentially exceed £9 billion if further claims follow. As regulatory bodies review industry standards, lenders must adapt to ensure consumer trust remains central to their practices, particularly as transparency becomes a renewed priority for the sector.
UK banks’ profitability has strengthened in recent years, supported by higher interest rates and contained impairment costs. However, more ratings could come under pressure if remediation costs affect earnings, capital ratios and business growth prospects over a prolonged period.
Barclays, Lloyds and Santander were named in the Fitch warning, although it stressed their ratings were “not immediately affected”.
All three currently have an “A” rating for their credit quality and any reduction would likely have only a small impact.
Specialist lenders Bank of Ireland, Investec Bank, Paragon and FirstRand were also included.
