Last week brought news that the announcement of findings from the FCA’s review of discretionary commission arrangements (DCAs) has been pushed back to May 2025. For background, DCAs allowed brokers to link their commissions to the interest rates on customer auto loans. The FCA banned the practice in 2021, to remove the incentive for brokers to set higher auto loan interest rates for customers.

The potential outcomes from the review (including remediations to consumers) begs the question: are there any risks to UK auto ABS investors? We think the risk, in terms of ABS rating downgrades and collateral losses, is low. Here’s why:

Across outstanding UK auto ABS, exposure to pre-2021 loans is generally quite low and continues to decrease as transactions pay down. Where deals are still revolving, some issuers are ensuring that any new pre-2021 originations will not be included in portfolio top-ups. Moreover, some new transactions have explicitly been structured to outright exclude these pre-2021 originations. Deals that do have exposure to pre-2021 loans will likely have credit enhancement materially in excess of any potential losses, particularly for investors in higher-rated tranches.

It is expected that any resulting remediation and potential fines would target the auto finance companies. Given that ABS transactions are structurally de-linked from these lenders, we consider insolvency of the lender to be the biggest risk here both in terms of potential set-off claims from borrowers and servicing disruptions. However, most transactions are supported by financially strong sponsors and securitisations can be structured to facilitate the transfer of servicing if needed. Since announcement of the review, we have seen varied responses from the market, from banks setting aside significant provisions for potential remediations or announcing they will not be paying dividends for FY 2024 to strengthen their balance sheet, to one lender telling us they outright never used DCAs.

Collectively, we think the aforementioned factors mean that risks to UK auto ABS remain pretty low – securitisation investors should look to the findings of the review in May 2025 (and the likely resulting consultations) but in our view, can take reassurance that losses are highly unlikely to be realised.

IMPORTANT INFORMATION

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

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