Financial institutions

Written by David Healey

Key developments in 2025

Motor finance claims continue to be a major issue for UK banks.  In August, the Supreme Court ruled in Johnson v FirstRand that motor dealers do not owe a fiduciary duty to customers, limiting the banks' overall exposure to potential claims.  However, the Supreme Court allowed Mr Johnson's claim to proceed on the basis that his relationship with the lender was "unfair" under Section 140A of the Consumer Credit Act 1974 because he was charged an excessive commission relative to the total amount of his loan and not informed of the commercial tie between the motor dealer and the lender.  This has left an avenue of redress open to many similarly situated consumers including those to whom inadequate disclosure of discretionary commission arrangements were made.  In October, the FCA published its Consultation Paper setting out its proposed industry-wide redress scheme to address liabilities for consumers treated "unfairly" between 2007 and 2024.  The redress scheme proposed by the FCA has been met with strong criticism from banks on the basis that the methodology used to calculate redress payments is too generous and will result in redress to consumers who have suffered no real loss.  

The collapse of two US companies (First Brands and Tricolor) has raised questions about the volatility and lack of regulation of the private credit market, where companies obtain loans from non-bank financial institutions.  Industry leaders, including the governor of the Bank of England and the head of JPMorgan Chase, have expressed concern that those bankruptcies could be a signal of wider problems in the financial system.

What to look out for in 2026

In the motor finance space, the FCA is set to publish its final rules for its proposed redress scheme in early 2026, with banks required to begin making redress payments later in the year.  The full exposure to the sector will become clearer once the FCA's final rules are published, but is anticipated by the FCA presently to be in the region of £11 billion (including the costs of implementing any redress scheme). 

The private credit (or 'shadow banking') sector has grown by 50% in the past four years, and regulated banks have also invested in or lent to private credit firms.  There is growing concern that an economic downturn (for example, a sharp correction in the value of AI stocks, as some are predicting) might have ripple effects across the banking sector given traditional banks' exposure to private credit firms and their comparatively weak and less regulated lending standards.

The increased use of AI by financial institutions is another issue to look out for in 2026.  According to Lloyds, half of financial institutions plan to increase their AI investment in the next 12 months.  Whilst the use of AI will no doubt bring benefits, it may also create challenges including the risk of regulatory and oversight failings.  AI is also increasingly used by fraudsters to target banks and their customers, and instances of Authorised Push Payment (APP) fraud (where someone is tricked into transferring money to a fraudster) continue to rise.