Auto finance faces barrage of ‘what ifs’

Feverish speculation has filled the auto finance sector with a tsunami of ‘what ifs’, as the industry awaits both the Budget and the results of the Financial Conduct Authority’s consultation on its redress scheme for commission disclosure cases.

In a flurry of leaked policy ideas from the Treasury, Chancellor Rachel Reeves appears to be considering a series of tax changes that will impact the automotive world.

The most eye-catching is a first step towards road pricing, with a proposed 3 pence per mile levy on electric cars. How this would be applied is unclear, but the potential negative impact on used values has alarmed leasing companies that have already suffered a crash in EV residual values.

Finding a second-life for used EVs, rather than remarketing them, is high on leasing company agendas. A key target market is salary sacrifice customers, with Zenith launching a fully digital used EV salary sacrifice scheme.

However, the Treasury appears to be scrutinising salary sacrifice plans, with pension contributions and bike to work schemes under the microscope. Salary sacrifice has been one of the biggest driving forces supporting EV uptake, leading to industry warnings that the UK’s transition to zero emission motoring could stall if these schemes become less attractive to employees.

One car finance model that is directly under threat is Employee Car Ownership Schemes (ECOS), used by OEMs and dealer groups to provide cars to staff without incurring benefit-in-kind tax. The SMMT warns that applying company car tax to these cars will cut new car sales by 80,000 per year, reduce the stock of nearly new models, threaten jobs and cost the Treasury £500 million in lost tax receipts.

In better news, the used car market recorded its 11^th consecutive quarter of growth in Q3, registering more than 2 million sales. One in 25, or 4%, of these sales were electric, raising hopes that some stability in EV residual values is starting to appear. Used EVs are selling in record time, according to Autotrader, although leasing companies suggest this is due to dealers cherry-picking cars they are confident will spend the shortest time on forecourts.

The new car market is also on track to exceed 2 million registrations for the first time since Covid-19, with EV sales accounting for a quarter of the market. This is still below the thresholds stipulated by the Zero Emission Vehicle Mandate, leading to suggestions that OEMs will be forced into distress marketing programmes in the last two months of the year.

Meanwhile, the FCA has announced an extension to the deadline for its consultation for a redress scheme for motor finance mis-selling to December 12.

The regulator is now expected to release final details of the redress scheme in February or March next year. Its outline proposals have been heavily criticised by Lloyds Banking Group, with the backdating of claims to 2007 drawing particular fire. Lloyds has added £800 million to its original £1.15 billion provision for settling claims, (after Barclays increased its own provision from £90m to £325m) and warned that the FCA’s approach jeopardises both future lending in the sector and the investment attraction of the UK.

One glimmer of hope in this long-running saga is news from the Financial Ombudsman Service that the number of cases brought by law firms and claims management companies has fallen by 37% year-on-year following the introduction of a £250 case fee designed to ensure complaints are properly evidenced and have reasonable prospects of success.