UK Auto Finance Insights – February

In an era when streaming services allow viewers to binge-watch their favourite shows, the drip feed of developments in the commission disclosure cases before the Supreme Court feels like a return to terrestrial television’s weekly episodes that end in a cliffhanger.

Barely a week goes by without a revelation or resignation, with Lloyd’s Bank making an additional £700 million provision for potential redress claims relating to its motor finance business. Together with £450 million set aside earlier, this means the UK’s biggest auto finance bank lender has now recognised a potential financial hit of over £1 billion following the Court of Appeal ruling last year.

Leasing company Ayvens (formed from ALD’s acquisition of LeasePlan) has also made a financial provision in case the court rules against lenders, setting aside €93 million, following a £165 million provision by Close Brothers and a £90 million provision by Barclays.

Estimates of the total compensation bill stretch to an economy-shattering £30 billion, prompting the Treasury to attempt to intervene in the case. Its application was rejected, although the Financial Conduct Authority (FCA) will be allowed to provide evidence to the Supreme Court.

The FCA has pledged “clarity on potential motor finance redress this year,” acknowledging that delays and confusion surrounding any decision it makes to introduce a compensation regime have damaged business and consumer confidence.

The authority has also committed to work more closely with the Financial Ombudsman Service (FOS), amid industry perceptions of a misalignment between the FCA and FOS in interpreting “certain FCA requirements.” The Finance & Leasing Association (FLA) argues that FOS is going beyond its remit by reinterpreting the FCA’s rules.

Any bridge building between the FCA and FOS will take place under new leadership, after the FOS Chief Executive and Chief Ombudsman, stepped down with immediate effect.

While the outcome of the commission disclosure cases occupies much of the bandwidth of automotive lenders and brokers, the new vehicle market has had a negative start to the year. The new car market was down -2.5% year-on-year in January, while van sales slumped -20.5% amid gloomy economic sentiment. The bright spots were the performance of battery electric cars (BEVs), with volumes up 41.6% for a 21.3% market share, and electric light commercial vehicles (eLCVs) rising to a 7.6% market share.

Sales of used BEVs soared 57.4% to 188,382 units last year, in a UK used car market up 5.5% to 7,643,180 transactions, but the residual value risks associated with used BEVs remain acute. The supply of used BEVs is outstripping demand, while in April electric cars will be hit by changes to Vehicle Excise Duty and the Expensive Car Supplement making them more expensive to own.

Rumours are circulating that the Government may offer interest-free or low-interest loans to stimulate retail demand for BEVs, which still cost on average 24% more than their ICE equivalents.

BEV pricing appears to be key to uptake, with Auto Trader research finding that younger drivers are migrating to more affordable Chinese brands. These could account for 25% of the UK’s BEV market by 2030, says Auto Trader.

The good news for lenders with BEV residual value exposure is that battery degradation appears to be minimal. An Arval analysis of 8,300 ex-lease BEVs found that the average battery health was 93% (compared to 100% when new).

Support of a different kind has arrived for BEV drivers who cannot charge at home, with a £65 million investment by the National Wealth Fund and Aviva Investors in Connected Kerb to boost on-street charging. This should assist eLCV sales, too, with the majority of van drivers not having off-road parking where they could install a charger.