Personal Wealth Management / Market Analysis
Some UK Stocking Stuffers
Rounding up the latest happenings in the UK.
2024 has been a busy year in the UK, with politics stealing much of the attention—from the summertime snap election to Chancellor Rachel Reeves’s October Budget. But there are other developments worth checking in on for investors, in our view. Here is a rundown.
Motor Finance Pulls Up to the Supreme Court
The UK Supreme Court agreed to hear an appeal in a landmark case alleging improper sales practices involving car loans. The case involves British lenders’ standard practice of paying car dealers to sell their loans—sometimes without buyers’ knowledge. In 2021, the Financial Conduct Authority (FCA) banned this “discretionary commission,” and the issue has since gone to the courts. This past October, the UK’s Court of Appeal ruled it illegal for banks to pay the commission to a car dealer without consumer consent.
The court decision was a surprise and roiled the car finance industry, prompting many banks to pause their auto finance lending as they assessed needed disclosures and paperwork changes, as well as potential exposures. The biggest issue, in our view, was the timing. Normally, a change like this goes through a long process involving a drawn-out rule writing and public comment period before a gradual implementation. Making a historically commonplace arrangement illegal overnight didn’t give lenders any time to review contracts and ensure compliance. The Supreme Court will now hear this appeal by mid-April next year and likely make a decision by summer or autumn 2025, which should ease uncertainty.
Though this episode roiled sentiment in one corner of the Financials sector, the macroeconomic fallout is limited, in our view. Car dealers did feel an immediate pinch, but it was short-lived. Analysts have begun estimating compensation fees lenders may face (anywhere between £10 billion and £38 billion), and banks aren’t sitting on their hands waiting to prepare. Lloyds Banking Group, the biggest UK auto lender, earmarked £450 million to pay for possible compensation.[i] Other analysts have noted consumer compensation might be more on a case-by-case basis than market-wide—further limiting the scale.[ii]
However, the court’s decision highlights a broader point about regulatory risk. Businesses can adapt to just about any rule change given sufficient time, but sudden changes create uncertainty, not just in the short term but over the long term, too (e.g., will regulators continue to implement unexpected changes?). That inconsistency can foster an environment that discourages risk-taking—a headwind. Now, this case seems like a one-off given the uniqueness. But the broad scope and impact could raise questions in some corners nevertheless.
The UK Enters the Pacific
Don’t take our subheader literally: The British isles did not, magically, join the Hawaiian island archipelago. But the UK did officially join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) this week—a (now) 12-nation trade pact including countries in Asia, North America and South America. This has been years in the making and is the CPTPP’s first transatlantic foray.[iii]
The UK applied to join in January 2021 and signed the treaty in July 2023. It acceded to CPTPP this past Sunday with 9 of 11 members ratifying the UK’s inclusion. Only Canada and Mexico have yet to sign off. Participants are cheering freer trade with a grouping of economies now worth £12 trillion, and we agree lowering commerce barriers is a positive overall.[iv] But don’t overrate the benefit. Per the UK Government’s own estimate, joining the pact will potentially add £2 billion a year in economic activity in the long run.[v] £2 billion is a big number in a vacuum, but it also amounts to less than 0.1% of UK GDP.[vi]
In our view, the benefits aren’t solely about economics. When the UK voted to Brexit in 2016, many commentators warned the nation was destined to become an isolated hermit. But the UK hasn’t turned away from the global economy, as these new ties show.
Ongoing GDP Chop
UK GDP fell -0.1% m/m in October, repeating September’s dip.[vii] Production output slipped -0.6% while services was flat.[viii] Now, a range of industries, from manufacturers to retailers, cited the October Budget as a headwind that weighed on business.[ix] Perhaps that explains the weak monthly read, which wouldn’t surprise us given political uncertainty’s tendency to forestall big-ticket purchases and investment. However, it is impossible to quantify the exact effect. Also notable: The response rate to the monthly business survey was lower than normal (e.g., the response rate for the services sector was 86.0% in October compared to 2023’s average response rate of 97.5%).[x]
While the weak GDP figure may disappoint, monthly GDP tends to be volatile, as one-off factors can have an outsized effect. Looking at longer-running trends, production has struggled while services has trended upward. (Exhibit 1)
Exhibit 1: UK GDP’s Trends Continued
Source: Office for National Statistics, as of 12/16/2024.
UK growth hasn’t been gangbusters, but it has exceeded expectations from the start of the year—a timely example of reality turning out better than initially estimated.
[i] “Close Brothers Gets Top Court Appeal of Motor Finance Ruling,” Eleanor Thornber, Bloomberg, 12/11/2024. Also, MarketMinder doesn’t make individual security recommendations, and any companies mentioned herein are coincident to the broader theme we wish to highlight.
[ii] “How a Car Finance Ruling Is Affecting UK Banks,” Sally Hickey, The Banker, 11/8/2024.
[iii] No talk of a name change that we have seen, alas.
[iv] “£2 Billion Boost to Growth as UK Joins Major Trade Group,” Staff, Gov.UK, 12/15/2024.
[v] Ibid.
[vi] Source: Office for National Statistics, as of 12/17/2024. Statement based on 2023 UK GDP.
[vii] Source: Office for National Statistics, as of 12/16/2024.
[viii] Ibid.
[ix] Ibid.
[x] Ibid.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.
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