(Bloomberg) — Britain’s banks gave investors reasons to be optimistic in their earnings over the past few days. But one key unknown won’t go away anytime soon: the ultimate cost of potentially mis-sold car finance.
The Financial Conduct Authority’s review of commissions for car loans remains a major drag on domestic lenders’ valuations, according to UBS analyst Jason Napier. Uncertainty around the application of UK rules on this issue is one of the reasons that British banks trade at lower valuations than their peers in the euro area, Napier said in an interview.
Lloyds Banking Group Plc, the UK’s biggest auto finance provider, on Thursday set aside £450 million ($570 million) for possible compensation and other costs linked to the review — the first major firm to take a charge. Barclays Plc, which exited its motor finance business in 2019, hasn’t taken a provision due to “uncertainty” around the FCA investigation’s outcome and the “very low” level of complaints the bank got, Finance Director Anna Cross told reporters on a call Tuesday.
Close Brothers Group Plc has a smaller total car loan book than Lloyds but it represents a larger portion of its business. The firm has canceled its dividend amid the FCA review, and this week got downgraded by credit rating firm Fitch to two notches above junk. Its shares have shed more than half their value since the beginning of the year as hedge funds Millennium Capital and Marshall Wace held and then exited short positions in the stock.
Smaller non-listed players expected to be affected by the FCA review include private equity-owned Blue Motor Finance, whose corporate lenders included Goldman Sachs Group Inc.
The FCA has said it will update on its review in September. The uncertainty has stirred speculation in the industry that some lenders might be forced to exit the market.
How It Worked
In an era of near-zero interest rates that made credit plentiful, nearly 90% of new car purchases in the UK were made on finance, according to the FCA when it examined the industry in 2018. Car dealers could often earn thousands of pounds for themselves, and the bank, by pushing up the interest rate they offered buyers, in a practice known as discretionary commission arrangements.
Before the FCA banned this approach in 2021, every loan rate would have its own assigned commission rate, a person with direct knowledge of the practice said. This setup systematically incentivized dealers to pick a higher rate, the person said, declining to be identified discussing private information.
The FCA has estimated that its ban is saving customers £165 million a year. Now, though, it’s been forced to take further action after a spike in complaints to the Financial Ombudsman from customers who were sold these loans. It’s reviewing loans dating as far back as 2007.
The legal industry is already compiling multiple country court cases in order to construct a class action case, according to Henry Farris, partner at law firm Withers LLP.“The class action has a much broader scope than what Lloyds has set aside,” Farris said in an interview. He estimated that 50,000 to 100,000 people could be enough to build a substantial class action — which were until recently a rarity in English law.
Pogust Goodhead, another law firm, has set up a portal for customers to submit claims. Global Managing Partner Tom Goodhead said it was a “watershed moment” for borrowers. “It’s high time that lenders are held to account over unfair practices that have left consumers unnecessarily out-of-pocket,” he said in a statement.
Economic Fallout
Along with the regulatory review, a mix of high interest rates and falling used car prices might spell trouble for banks — especially those who lend to less affluent customers.
“In the pandemic, interest rates 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 that lends directly to consumers, rather than through dealers. “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.”
Some industry watchers see banks potentially slowing down lending, which could lead to fewer used car sales. Banks might also decide to further trim their workforces in this space. To be sure, Lloyds reported this week that motor finance continued to grow last year, and it now has £15.3 billion on its loan books.
“Undoubtedly the future products and services of banks and non-bank lenders may be influenced by the FCA’s decision,” said Isabelle Jenkins, who leads the financial services practice at PwC UK. But “it remains to be seen what this may look like.”
–With assistance from Katherine Griffiths, Ellie Harmsworth, Joe Easton, Harry Wilson and Aisha S Gani.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
