The Financials Unshackled Weekender | Issue 65 (19th Oct 2025) - Motor Finance Provisions, Bank Taxes, and Much More
The independent voice on banking developments - No stockbroking, no politics, no nonsense!
The material below does NOT constitute investment research or advice - please scroll to the end of this publication for the full Disclaimer
Welcome to Issue 65 | ‘The Financials Unshackled Weekender (19th Oct 2025)’ - your weekly pack for critique and curation of key banking developments. This note catches up on key newsflow from the last two weeks (I had to unexpectedly travel last Sunday) and zones in on a few select items rather than the usual elaborate curation.
UK lenders bump up motor finance provisioning
What Happened? - A Synopsis: The FCA published its keenly-awaited Consultation Paper in relation to a motor finance compensation scheme on Tuesday 7th October, which remains open until 18th November. The regulator estimates that 44% of all motor finance agreements entered into since 2007 (i.e., 14.2 million agreements) will be considered unfair because they involve inadequate disclosure of one or more of: i) a discretionary commission arrangement (DCA); ii) high commission (which the FCA has determined relates to commissions that are 35% or more of the total cost of credit and 10% or more of the loan amount); and iii) contractual ties that gave a lender exclusivity or a right of first refusal. Assuming that c.85% of eligible customers take part in the scheme, the FCA estimates that total redress (including interest) costs will come to £8.2bn. Scheme implementation and operational costs of £2.8bn would take the total cost to c.£11bn, on the FCA’s estimates. Lloyds Banking Group (LLOY) and Close Brothers Group (CBG) announced this week that they intend to materially increase their related provisions - by £800m in the case of LLOY (to £1.95bn in total) and by £135m in CBG’s case (to £300m in total). Bank of Ireland Group (BIRG) also announced (last week) that an increase in its provision is likely to be required which may be material. Both LLOY and CBG, in their announcements, expressed their concerns with the proposed redress methodology, proportionality issues, and misalignment with the legal clarity provided by the Supreme Court judgement in respect of the Johnson case. FirstRand also said last week that “the group’s initial view is that the scheme appears to have moved beyond the group’s expectations of what can be considered proportionate or reasonable” and it was also reported in The Times on Sunday 12th October that BMW executives are seeking to hold talks with the Chancellor in relation to the scandal. The Finance & Leasing Association (FLA) has also cautioned that the redress plan risks overcompensation. Finally, it is worth noting that the FCA CEO Nikhil Rathi was challenged in the House of Lords on Wednesday, with peers noting that the legal thinking behind the proposals showed a “deep lack of clarity”.
Unshackled Perspectives:
Thankfully we got a sensible judgment from the Supreme Court in August - indeed, as Alistair Osborne wrote in The Times earlier this month “Anyone who really thought motor salesmen have a “fiduciary duty” to consumers that overrides their own interests is surely too thick to be driving a car.”. The additional provisions that LLOY and CBG intend to take appear, at first glance, sufficient in the context of the FCA’s own total costs estimate of £11bn, taking into account: i) historical market share of originations over the 2007-24 period; and ii) the FCA’s estimate that banks account for c.51% of the total expected costs (captive lenders c.47%, independent lenders c.2%) based on the detailed analysis it conducted to inform its estimate (which it discusses in Technical Annex 3: Market Impacts to the Consultation Paper). However, that’s just a high-level first glance view and there is a significant variation in usage of DCAs and lending practices amongst lenders.
The consultation runs until 18th November and I expect that the FCA will be overwhelmed with challenges from lenders and other interested parties. I expect that significant political pressure will be exerted on the regulator to revise the parameters of the scheme. In particular, I expect there will be enormous pressure on the FCA to revise up its own determination that commissions that are 35% or more of the total cost of credit and 10% or more of the loan amount are “unfair”. The issue is to what level. We know that 55% was deemed too high by the Supreme Court in the Johnson case - but we don’t know where the Court would ‘draw the line’ (so, any figure below 55% presents the risk of legal challenge). The devil is in the detail and I appreciate I am only scratching the surface in terms of what will likely be challenged in the above comments but my gut view here is that the FCA will be pressured into softening the parameters of the scheme to the benefit of lenders.
Essential Resources: FCA press releases of 7th October here and here, FCA Dear CEO letter of 7th October here, FCA 360-page Consultation Paper of 7th October here (and the aforementioned Technical Annex 3 is here), FCA slide deck for analyst briefing of 7th October here and transcript of analyst call here, Yonder Consulting Motor Vehicle Finance Consumer Research prepared for the FCA here, FCA Research Note on Motor Finance Consumer Awareness Survey analysis here, interview with FCA CEO in The Times of Friday 17th October here, and a useful article in The Sunday Times this weekend on why lenders are angry with the proposed scheme here.
UK bank taxes in focus
What Happened?: UK Finance published its 2025 Banking Sector Tax report (prepared by PwC) on Wednesday 15th October (press release here and report available here) with the report’s authors estimating that the total tax contribution of the UK banking sector was £43.3bn in the fiscal year to end-March - and computing that the average tax take from the sector’s profits was 46.4% (versus 42.2% for Amsterdam, 38.9% for Frankfurt, 28.9% for Dublin, and 27.9% for NY). This is a timely report that typically comes out shortly ahead of the Budget every year. The FT reported on Thursday here that UK Chancellor Rachel Reeves has acknowledged that UK banks face higher taxes than in some other jurisdictions and remarked that she wants to have “a competitive environment for all businesses in Britain” - in comments made on the sidelines of the IMF meetings in Washington D.C. It has previously been reported that Treasury is considering increasing the surcharge back up to 8% again (from 3%) and I reported in some detail in Financials Unshackled Issue 59 on 1st September here on the IPPR’s recommendation that the government implement a ‘QE reserves income levy’ on commercial banks.
Unshackled Perspectives:
Reeves has not ruled out an increase in taxes so it seems fair to therefore assume that one is under consideration.
The Chancellor is under significant pressure to boost fiscal revenues. Banks have historically been an easy target in this vein despite the fact that they already face much higher tax bills than companies operating in other sectors of the economy.
My views have evolved. In early September I noted that I saw the probability of higher taxes at <50% and I now think that was too bullish and my expectation is that there will be an increase in the surcharge. Indeed, I suspect there is a real possibility it will go back up to 8%. I think it is possible that we will see an increase in the minimum threshold before which the surcharge becomes payable from £100m to £150m - or, perhaps, £200m - in a show of support to smaller banks. I don’t expect the existing reserves remuneration regime will be tampered with in this Budget - the BoE Governor has staunchly defended the reserves remuneration regime and the Chancellor is on record, acknowledging Bailey’s arguments: “We have no plans to do that. And actually the paying of interest on reserves is part of the transmission mechanism for monetary policy, it’s one of the ways that higher interest rates filter through to the real economy” as the FT reported here in June 2024.
If I am right, I suspect that the Chancellor will seek to soften the blow to the banks by seeking to convince them that the Treasury is working intensively on other regulatory softening measures (including the Capital Framework Review), with significant reprieves en route for the sector - and committed to flexing its muscles in the context of the motor finance redress consultation. Indeed, in a related vein, it was interesting to read Mark Kleinman’s piece in CityAM of Thursday 9th October here in which he noted that “A search for Britain’s top banking regulator is about to get underway, and the word in Whitehall is that the chancellor has a clear idea of the type of person who should succeed Sam Woods”.
Shawbrook confirms intention to float
What Happened?: Shawbrook Group issued an ‘Intention to Float’ announcement on Monday 6th October and published a Registration Documentation that same date (both documents can be accessed here). The FCA announced that it had approved the Registration Document later that morning and, on Monday 13th October, Shawbrook issued another RNS, confirming its intention to float.
Unshackled Perspectives:
Shawbrook’s owners, Pollen Street Capital and BC Partners, appear to me to have picked a good time to pluck for a listing given the strong rerating of UK bank stocks that we have seen in recent times - reinforced by the new bar set for UK bank valuations in M&A set by Santander’s recent acquisition of TSB. Investor sentiment towards bank stocks remains strong. The question as to whether bank taxes will climb in the 26th November Budget remains open but Shawbrook’s PE owners have decided to get on with it and presumably accept they need to leave ‘something on the table’ for other shareholders anyway to keep investors and prospective investors warm for potential further sales of their shares.
Shawbrook is a name I have been following for years and I will make just a few key observations at this point: 1) Its strong growth (organic and via acquisition) and its consistent delivery of c.20% adjusted RoTEs since 2021 differentiate Shawbrook somewhat from peer specialist listed UK banks, especially from a loan growth perspective - and it is therefore no surprise to me that Shawbrook has been positioned as a ‘high growth, high returns’ story though it is notable that the medium-term adjusted RoTE target is for “high teens”. 2) Shawbrook has delivered a consistent reduction in its CIR (from 65% in FY13 to 40% in 1H25), which is a key underpin for its strong returns profile. 3) The targets laid out in the IPO documentation are high - particularly: i) its target to almost double the loan book to £30bn by end-FY30 (though, as the documentation notes, this would necessitate a materially lower CAGR (11%) than what the business delivered over the FY18 through 1H25 period (18%) - but delivering a 11% CAGR as a bank grows in size over a 5Y period while maintaining strong credit quality is no mean feat); and ii) its target to drive u/l CIR to the mid-30s (expected high 30’s excl. one-offs in FY25) though, again, management has shown it can deliver in this respect. 4) While I can understand the motivation behind the description of Shawbrook as a “differentiated UK digital banking platform”, to me, Shawbrook is a bank and I suspect prospective investors will benchmark Shawbrook against the likes of OSB and PAG (most particularly) in their assessment. The benefits of the platform come through in the financials anyway. I’ll have more to say on Shawbrook in due course.
Irish banking competition
What Happened?: The Irish Times reported on Thursday here that Avant Money, the Irish unit of Bankinter, has kicked off a ‘soft launch’ of its Irish deposits by offering a small number of its existing retail customers access to a 2.6% AER 6M fixed term deposit product for a limited period. The article further notes that a full launch of Avant’s deposit product offering will follow in November, according to a spokesman for the company.
Unshackled Perspectives:
The rate offered on this 6M retail term product is materially higher than that available on equivalent product procured by the three listed lenders (AIBG 1.50% per this table, BIRG 1.51% per this table, PTSB 1.25% per this table). That being said, Irish bank deposit customers are notoriously inert and few have moved to higher-priced product available even within the same institution with the vast bulk of funds languishing in overnight product.
We don’t know yet what Avant’s deposits proposition will look like. This is just one product. If sustained, it will likely see some flows due to its competitive nature but we will have to wait until the full launch in November to find out more. I have previously speculated that currently ultra-low-priced easy access savings product (demand accounts) could be a key point of attack for Avant. Notably, MoCo (Bawag) recently launched an overnight instant access deposit account in Ireland offering a market-leading rate of 2.00% AER. I think attractively-priced demand accounts are the only meaningful lever that can be deployed to attract significant flows from the domestic banks - but is a lever that will require intensive marketing efforts to educate consumers as there is a notable absence of political or regulatory initiatives to do this / facilitate switching.
I noted in Financials Unshackled Issue 53 in July that Bankinter CEO Gloria Ortiz noted that Bankinter expects Irish PBT to reach €100m in three to four years, up from €41m in FY24. This does not imply enormous growth but it is significant - and could indicate that Bankinter’s growth ambition in Ireland may be stronger than previous comments suggested.
On a final note on Irish banking competition, I picked up on Revolut’s Irish deposit-gathering initiative in a broader piece in the Business Post this weekend here which focused on whether Revolut can, ultimately, grow into its reported $75bn valuation: “…the company made much fanfare about its Irish deposit-gathering initiative a year ago. Yet, by my calculations, it appeared that Revolut had amassed less than €1 billion in total deposits earlier this year, despite offering relatively attractive rates. That’s from a three-million-strong customer base in a deposit market of roughly €250 billion in size.”.
Private credit contagion in the spotlight
What Happened?: The market took fright at the failures of US auto lender Tricolor Holdings and US auto parts supplier First Brands Group, anxious around further credit losses surfacing - with JPMorgan CEO Jamies Dimon’s comment that “when you see one cockroach there are probably more” resonating amongst market participants. It brought into sharp focus - again - the interconnections between regional and non-bank lenders and the larger commercial and investment banks.
Unshackled Perspectives: The private credit industry is still just a fraction of the bank lending industry but, with total assets of >$2tn, the potential for meaningful problems is clear - especially given opaque lending standards and the absence of regulation (which the FSB has been warning about for more than a decade). However, what concerns many banking industry observers specifically is the interconnections between the banks and the private credit market - with the IMF noting last year that “Data constraints make it challenging for supervisors to evaluate exposures across segments of the financial sector and assess potential spillovers”. Indeed, Elizabeth McCaul, a member of the ECB Supervisory Board remarked in a speech about a year ago that “We have recently completed a deep dive on the topic and found that banks are not able to properly identify the detailed nature and levels of their full exposure to private credit funds…We should further harmonize, enhance and expand reporting requirements”. Indeed, a recent paper published by the IMF on synthetic risk transfers (SRTs) here highlighted a concern with SRT circularity, i.e., where credit funds finance their investments using bank debt, potentially increasing systemic leverage. Dominique Laboureix, Chair of the FSB, expressed his concerns to the Business Post here, noting that “a number of interconnections [with the banking system] are growing... with other actors that are less regulated, or not regulated at all”. For what it’s worth I expect that markets will settle pretty quickly but the concerns in relation to banks’ exposures to private credit will remain in focus.
📆 The Calendar 📆
Look out for these in the week ahead:
🇬🇧 Wed 22nd Oct (07:00 BST): Barclays (BARC) 3Q25 Results (for the three months to 30th September)
🇬🇧 Thu 23rd Oct (07:00 BST): Lloyds Banking Group (LLOY) 3Q25 Results (for the three months to 30th September)
🇬🇧 Fri 24th Oct (07:00 BST): NatWest Group (NWG) 3Q25 Results (for the three months to 30th September)
⚠️ Disclaimer ⚠️
The contents of this newsletter and the materials above (“communication”) do NOT constitute investment advice or investment research and the author is not an investment advisor. All content in this communication and correspondence from its author is for informational and educational purposes only and is not in any circumstance, whether express or implied, intended to be investment advice, legal advice or advice of any other nature and should not be relied upon as such. Please carry out your own research and due diligence and take specific investment advice and relevant legal advice about your circumstances before taking any action.
Additionally, please note that while the author has taken due care to ensure the factual accuracy of all content within this publication, errors and omissions may arise. To the extent that the author becomes aware of any errors and/or omissions he will endeavour to amend the online publication without undue delay, which may, at the author’s discretion, include clarification / correction in relation to any such amendment.
Finally, for clarity purposes, communications from Seapoint Insights Limited (SeaPoint Insights) do NOT constitute investment advice or investment research or advice of any nature – and the company is not engaged in the provision of investment advice or investment research or advice of any nature.