Banks and Car Finance

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29th Oct '24 by Charles Mitchell

16 comments 1001 reads

I do not hold any of the major affected stocks-Close Brothers (LON:CBG) Lloyds Banking (LON:LLOY) Secure Trust Bank (LON:STB) . I have held STP several times, sold a few months ago as I thought the price strength did not reflect the risk of the regulators getting tough. But the price has now been in free fall, yield back up to 5.5% and a p/E of 2.5x. I cannot get a handle on what the liability for STB might be. Vehicle Finance was £498m at HY 2024, but as I understand it some of that is Car dealer loans for vehicle stock financing. Does anyone have a better idea as to the potential liability STB may face ?

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About the Author

Charles Mitchell

Premium Member

Worked in the City of London 1976-1988- blue button on the floor, Fund manager assistant at a large Investment Firm, then moved into institutional Investment Trust sales,spent a Year in New York for a UK stockbroker. Set up a small corporate finance firm - managed a small Investment fund. Left broking and worked in various businesses before setting up an online B2B business in 2012. more »

16 comments

timarr

29th Oct '24

Hi Charles

As far as I am aware STB has never made any proper pronouncements on its possible liability or made any provisions (unlike Close Brothers (LON:CBG). The only thing they have said is:

We note the FCA's recent announcement about discretionary motor finance commissions. We operated some discretionary commission arrangements until 2017. From 2014 to 2017, a mid-single digit proportion of our new vehicle finance loans included such arrangements. The FCA plans to set out its next steps in Q3 2024, when the implications for the industry should become clearer. We will provide further information to the market on these developments as appropriate.

https://www.investegate.co.uk/...

With a further update at the interims that said the same.

On the face of it the fall seems overdone, but these regulatory processes take forever, even without the appeal, so this is likely to hang over the stock for some considerable time.

I no longer hold, having sold as soon as the result of the High Court hearing was announced.

timarr

rmillaree

29th Oct '24

The problem with stuff like this is that we are completely at the bottom of the food chain ref information , do you ever want to be betting/gambling on a situation where the big money going in the opposite direction to you and likely has more information at their figertips than you do. Ok soemtimes there is no inside info and its simply people rushing for the door creating genuine bargain.

I do see the temptation as a binary bet where at face value it doesnt sound to bad but i think it has to be said with situations like this yopu pay your money and take your chance.

Often times of extreme fear can be best times to add.

There was some pretty decent warnings around here at the time that the shyster type activities of some of these companies would perhaps result in them getting their comeuppance. to me it was so obviuously wrong if saleman could pick their interets rate of choice and was not flagging up that the higher the rate they picked the more moeny they made and that te interets rate was not based on circumstances - then only surprise to me is that it is taking so long for the book to be thrown at these companies.

MrBrains

30th Oct '24

Just for info.

This latest fall is not about discrectionary finance but ALL motor finace. GooGle latest motor finance news for a better understandin.

good luck

rmillaree

31st Oct '24

It’s not new news as such - where we are now has been so obviously coming that the finance companies and garages that are suffering have buried their head in the sand - when you buy a house kickbacks paid are clearly pointed out - finance companies should have been in this simple clear position for the last 24 months ahead of judgement day - the writing is on all the wall and the shysters are getting outed. the recent cases won should be no shock to anyone

Glen Keedy

31st Oct '24

I have previously owned Secure Trust Bank (LON:STB) and wondered if the recent price was a good entry point. But the FCA and courts are after hidden car loan commissions and I believe it will lead to a mis-selling scandal bigger than PPI.

For PPI from FCA site:

“The PPI saga can be characterised as an iceberg rising from a foundation of at least 45 million policies sold. The largest number of policies were sold between 1990 and 2010. By April 2021, most of the complaints made in the run-up to the 2019 deadline had been handled. At that point, the total amount paid in refunds to customers was over £38.3 billion.”

For Car loans Google says:

“In the UK, consumers financed a record 1.5 million used cars in 2023, with the total amount borrowed estimated to be £23 billion. This is a 164% increase from 2013, when only £9 billion was loaned out for used car purchases.”

I think vehicle finance companies are on the hook compensation at least the size of PPI. All those no win no fee lawyers and daytime TV ads will be running this and the companies will, as always, underestimate the liabilities as no CEO wants to own up to the full story and each year will see a larger amount set aside for payment to customers.

STB annual report says:

“In January 2024, the FCA announced it was to undertake a review of discretionary commission arrangements in the motor finance market. Vehicle Finance sometimes operated these arrangements until June 2017, ahead of the FCA banning their use in January 2021. We believe that the overall proportion of loans where we used discretionary commission arrangements was small and for a shorter period, relative to the industry in general. The FCA plans to set out its next steps in Q3 2024, when the implications for the industry should become clearer.”

For STB, last year vehicle financing new business made up just over 20% of loans. The question is, when did “discretionary commission arrangements” start and what percentage of business was vehicle loans during that time? That would require looking through the last 20 years of annual reports!

This saga is going to drag on over years and this makes the sector uninvestable for me. There’s easier to value stocks and sectors out there!

PitBullCH

1st Nov '24

It's just trying to put motor finance on the same path as most other financial products e.g. mortgages, pensions, life insurance etc such that commission payments must be transparent - not exactly rocket science, should not per se be controversial, but motor industry has rather had it's head in the sand over this for a couple of years hoping it would go away - which it never was.

MrBrains

1st Nov '24

As far as I am aware , banks, finance companies and motor dealers were all operating within the law since guidelines set by the FCA in 2021. The law was only revised with a judgment on 25 Oct. 2024.

Be interesting to see the views of the Supreme Court when /if it gets t there ?

Best of luck to all holders

roddy10

15th Dec '24

The relevant court case is [2024] EWCA Civ 1282 - google it and ye shall find.

One of the beauties of UK courts is that they try to explain their reasoning in their judgements.

It is worth reading:

- amongst other points I think one of the key points is whether the relevant consumers were 'vulnerable' to some extent

- that the dealers / lenders failed to point out explicitly that a commission WOULD be paid and the AMOUNT (the wording often said 'may be paid); and the wording was often hidden away

- the dealer owed a duty of care (they describe it as a fiduciary duty / disinterested or impartial basis) to the consumer

- in the case of at least one dealership FirstRand (a lender) had a preferential relationship with that dealer so it is not clear if the consumer was offered the best deal in the market / amongst the panel that the dealer checked with

- there is some discussion of whether the dealer is the agent of the lender or the consumer - or can be for both at once

There are some quaint / old world concepts however that are also raised:

- if the consumer shows no interest in reading the docs?

- was there partial disclosure (ie the docs said there may be a commission but not the amount)

- are the lenders liable based on bribery laws (!)

I think the last paragraph in the judgement is very interesting as the Court of Appeal effectively says that the Supreme Court might in future consider making a 'definitive pronouncement'. This in itself seems to suggest that they felt that the lenders had an arguable case.

The penultimate paragraph however is also of note - one of the lenders was FirstRand and the Court of Appeal says, in essence, that FirstRand's behaviour was 'blameworthy'.

With regards to Close, at para 27 there is an odd sentence in essence saying that Close submitted a 'Terms of Business' from March 2014 which said the commission would be calculated by reference to Schedule 1. However it goes on to say that Schedule 1 was redacted - I am not sure what that is about.

The above raises quite a big question in my mind. In the case of Hopcraft vs Close Brothers the judges note that Hopcraft was not financially sophisticated. So the dealer in essence owed more duty of care. I understand this - but where is the limit. Eg in the case of Mr Wrench (which is also covered), Mr Wrench did not read the documents. But the judges also note (para 37) that 'in reality, there was a negligible prospect of the consumer reading any of the standard terms and conditions, and FirstRand must have appreciated this.'

So when is a contract with a consumer valid and fair and not open to subsequent challenge?

abtan

15th Dec '24

Hi roddy10

I also spent time reading the judgement and found it fascinating, especially as it's not something I usually do and I do not have a law background.

What I found most interesting was that the judge concluded that the entire liability would rest with the lender:

I can't really understand this.

From a layman's point of view shouldn't the dealer partly or totally be liable to repay any commissions?

After all they had the most to gain from having agreements with lenders in the first place. If they really cared about their end customer they would have more than one lending option available as well, not just ones that paid them the most commission...I'm still amazed that their commission in one of the cases was 25% of the total loan.

I don't own Close Brothers (LON:CBG) or Lloyds Banking (LON:LLOY) but I'll be watching with interest to see how this plays out.

Many thanks for taking the time to share your thoughts.

Westway001

15th Dec '24

Presumably because the dealer is the finance company’s agent, and therefore the finance company is liable for its agent’s misfeasance?

abtan

15th Dec '24

But the dealer can choose to have arrangements with many financing companies at the same time.

If they only had one choice then what you say would make sense.

Westway001

15th Dec '24

I’m not sure the law has changed, making a secret profit has always been unlawful. The issue may be that the (totally unfit for purpose) FCA apparently condoned such actions, albeit unlawful, thus leading the lenders and motor dealers to think that it was ok.

roddy10

16th Dec '24

Hi abtan:

I am not a lawyer either.

I agree with you that it was a fascinating read.

I *think* there were several strands to the liability being with the lender. I think the main one (especially in the FirstRand case) was that FirstRand had in essence 'bribed' the dealer by having first right of refusal. And I think that is where the discussion of bribery and it is the person paying the bribes that as the corrupting influence is liable. But bribery law is a bit awkward in this case.

Secondly I think was that the dealer was acting on behalf of FirstRand who seemed to have some slightly questionable paperwork which failed to draw attention to the fact that they paid commissions etc.

Thirdly the customer had the right (?) to assume that the dealer was acting fairly / equitably / on behalf of the customer and FirstRand's partially secret payment to the dealer meant that FirstRand was undermining that.

But I came away thinking I need to re-read a further 2 - 3 times to capture all the subtleties (and read up all the references to all the other cases mentioned) so could end up being many days work.

I also got the feel that the Appeal Court judges were not entirely comfortable with the case law and hence the comment at the end that the Supreme Court might wish to give guidance. What was also fascinating was that some of the case law they used was very old and I think in some cases from other Commonwealth countries (not in front of me right now but I think I saw 1-2 references from outside the UK).

The other issue that fascinated me is how this interacts with the 'duty of care' for vulnerable people that the FCA often refers to. In other areas the FCA requires communication with the general public to be at a suitable 'reading age' which I believe is considered to be circa 8 - 9 years old.

I would observe in passing that in some US states lending on eg second hand cars is not so tightly regulated and people end up paying several multiples of the value of the car in financing etc.

timarr

16th Dec '24

From a layman's point of view shouldn't the dealer partly or totally be liable to repay any commissions?

I agree that it's an odd position. Under the UK's current Consumer Duty rules - which have been in full force since July of this year - I think dealers would be at risk as well as the finance providers because it clearly applies to the whole distribution chain.

The Consumer Duty isn't retrospective but does apply to any contracts currently in force.

It's concerning that the car finance industry hadn't already recognised the issue - the Consumer Duty has been coming since 2022, and all firms were supposed to have conducted a review of their services. Quite how you could perform that review and conclude that hidden commissions were OK is a mystery. For example, Principle 7 states:

A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

Overall I don't think it's possible to assign probabilities to the outcomes here, so it's an area I'm avoiding as much as possible.

timarr

David Wordsworth

8th Jan

Secure Trust Bank (LON:STB)

Just something I read that doesn’t quite marry up.

As said earlier in this thread, STB said their exposure to DCAs was ‘mid single digit’ from 2014-2017.

However their vehicle finance division is called V12 and Martin Lewis’s website states V12 had no exposure to DCAs?

https://www.moneysavingexpert....

Thoughts?

David Wordsworth

18th Feb

https://www.theguardian.com/bu...

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Charles Mitchell

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