Bank of Ireland’s shares jumped in early trading on Tuesday after it emerged that the UK chancellor of the exchequer Rachel Reeves has launched a bid to protect motor finance providers from multibillion-pound payouts that could flow from a landmark supreme court case.
Shares in Bank of Ireland, which has a 2 per cent share of the UK motor finance market, were up 2.6 per cent in early trading in Dublin.
The London-based court will hear an appeal in April against a lower London court ruling three months ago in three test cases that it was unlawful for a car dealer to receive a commission from a motor finance lender, if the customer had not given informed consent.
This set a bar higher than required by the UK Financial Conduct Authority (FCA) which has, separately, been carrying out a industry-wide review into whether UK motor finance customers were overcharged because of historical use of discretionary commission arrangements (DCAs) between car dealers and lenders. That investigation covers 14 years before such arrangements were banned in 2021 in the market.
The outcome of the court case will have a bearing on a likely industry-wide customer redress scheme that the FCA will outline this year.
In a highly unusual move, Ms Reeves has written a submission through the UK treasury department to the supreme court, applying to intervene in the hearing, the Financial Times reported. The Treasury claims that the case has the “potential to cause considerable economic harm and could impact the availability and cost of motor finance for consumers” and that the case might “generate a perception that regulation in the UK is uncertain”, according to the report.
Shares in UK lender Close Brothers, which is pursuing the supreme court appeal, soared more than 20 per cent.
Treasury is also seeking to persuade the supreme court that, if liability is established, “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall”. Permission to intervene is granted only if the court believes it will offer significant assistance to the judges who will hear the case.
“This morning’s newsflow, that the Treasury is seeking to intervene in the supreme court motor finance case, is clearly positive for the banks with motor finance exposure,” said Benjamin Toms, an analyst with RBC Capital Markets.
“Nevertheless, it’s worth noting that we have a clear separation of powers in the UK, so the ultimate outcome will be solely determined by the views of five supreme court Judges hearing the case in April. In our view, there has been a clear sentiment change from both the regulator (FCA) and the government on this topic in the last two months, with both institutions rallying behind the banks.”
RBC estimates that Bank of Ireland faces a £591 million (€699 million) pretax profit hit as a result of refunds, compensation and other costs stemming from the FCA’s industry-wide examination. It sees Lloyds Banking Group, the largest player in the UK motor market, taking a £2.49 billion hit.
A downside scenario could wipe £1.09 billion off Bank of Ireland’s profits, according to RBC. Lloyds’ shares were up almost 5 per cent in London, while Barclays, which is also exposed, gained 1.7 per cent.
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