The UK vehicle financing arm of Bank of Ireland, Northridge Finance, has temporarily ceased issuing new financing deals in response to last week’s significant court ruling. The spokesman for Bank of Ireland acknowledged that Northridge, which controls a 2% share of the UK market via a car finance portfolio worth around €3 billion, has temporarily halted new financing proposals.
Following a judgment by the London court of appeals, car finance intermediaries are now obliged to fully disclose the presence and magnitude of commissions when customers take out car loans. The ruling is part of a broader UK Financial Conduct Authority (FCA) auditing of previous industry practises.
Several auto finance firms, like Bank of Ireland, have temporarily suspended new loan services this week as they amend their products, client disclosures, and commission-related consents. A few are already back to lending.
Although the spokesperson from Bank of Ireland didn’t give specifics on when Northridge will start lending again, it’s anticipated that lending could gradually resurface next week.
The main focus of regulatory reviews and court proceedings are discretionary commission arrangements (DCAs) on car loans, prior to their prohibition by the FCA in 2021. This allowed car dealers and brokers to set car loan interest rates above a minimum rate established by the actual lender, leading to increased commission earnings. The review period by the FCA extends from 2007 to 2021.
One of the three lenders implicated in the test legal proceedings, Lloyds Banking Group, suggested on Monday that the court’s unexpected decision raised the standard for the disclosure of, and agreement to, any commission paid. This was an higher disclosure level than the motor finance sector had previously known or applied. The remaining lenders involved in the lawsuits were merchant bank Close Brothers and a division of FirstRand Bank in South Africa.
The judgement decreed that the vehicle dealers had violated a fiduciary duty under common law to operate in the best interests of clients and had created a situation of conflict. The trio of lenders have been instructed to reimburse the commissions to the borrowers.
On Wednesday, Bank of Ireland released a business report acknowledging the verdict of the UK court and continuing to “observe the progress closely”.
The verdict could lead to a compensation package far greater than originally forecasted by the analysts, with potential costs reaching into the tens of billions sterling for the industry.
In the marketplace, RBC Capital Markets analysts had a shared opinion before the UK court’s decision on the three trial cases that the Bank of Ireland might face compensation and associated costs of less than €200 million due to this industry-wide concern.
Nevertheless, RBC have subsequently elevated its individual sector estimates which are well above the consensus, and it now forecasts that the cost for Bank of Ireland, including penalties, compensation and operational costs, could reach €950 million.