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Senior judges have sided with consumers who complained about “secret” commissions on car loans, in a landmark ruling that wiped almost a quarter from Close Brothers’ shares and put the rest of the sector at heightened risk of compensation payments.
Lawyers warned that the motor finance industry could face a costly customer redress scheme after the Court of Appeal found that certain commissions lenders paid to car dealerships for arranging loans were unlawful.
The ruling on Friday put the industry on the hook for hundreds of millions of pounds in potential compensation according to James Daley, head of consumer group Fairer Finance. He added it was a blow to “all car finance firms” that used “opaque” commission structures.
One lawyer who advises clients in the sector said the judgment was the “worst possible outcome” for lenders.
Close Brothers, the most exposed lender to car finance in relative terms, said it had paused selling new car loans in light of the judgment. It intends to take an appeal to the UK’s Supreme Court.
The company said the precedent set by the ruling could result in “significant liabilities”, sending its shares down more than 24.5 per cent on Friday.
Shares in Lloyds Banking Group, which owns Black Horse, the country’s largest car finance provider, closed almost 2 per cent down after earlier being more than 7 per cent off.
Lawyers said the ruling would be likely to influence the UK financial regulator’s decision on whether to implement a redress scheme. So-called discretionary commission agreements on car loans were banned in 2021, but the Financial Conduct Authority is investigating potential historic mis-selling.
Analysts estimate that lenders could ultimately be forced to pay out as much as £16bn, which would make it the sector’s most costly redress scheme since banks paid billions of pounds to people who were mis-sold payment protection insurance.
The Court of Appeal was asked to rule on payments that lenders made to dealerships, after several claims brought by consumers in the county courts. The customers complained that the dealers were being paid by banks without their knowledge through “secret” commissions and that they were not in a position to give fully informed consent.
In the ruling on Friday, Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said to give such consent, consumers would need to be informed about the amount of commission paid by lenders and how it was calculated. That did not happen in the cases they were asked to consider.
Emma Deas, a partner at law firm Herbert Smith Freehills, said that while there were aspects of the Court of Appeal ruling that were specific to the facts of those particular cases it was considering, it still had “potentially significant implications for lender liability”.
“The court’s analysis in relation to potential liability for lenders in cases where there has been partial disclosure [of the payments to consumers] is of particular significance,” she said, adding this was “likely to be of concern to lenders who have been part of similar arrangements”.
Gary Greenwood, analyst at Shore Capital, said the FCA would “no doubt take the outcome of such cases into account when trying to determine if remediation is required and how this should be assessed”.
Lloyds earlier this year set aside £450mn to cover the potential impact of the probe.
Shares in Close Brothers had already more than halved since the FCA announced its review at the start of the year, prompting it to embark on a restructuring plan to bolster its capital.
Benjamin Toms, an analyst at RBC Capital Markets, said Friday’s ruling “potentially widens the scope of the issue for UK banks”, adding that “any finance commission model where the exact quantum of the commission was not disclosed to the customer could also get captured by the judgment”.
The FCA said last month it was extending the pause it had imposed on compensation claims by customers seeking redress on car financing costs — designed to allow time for court rulings in cases involving Close Brothers and Barclays.
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