A group of lenders won a major reprieve in a pivotal UK car finance case, after the country’s top judges agreed that banks should only pay compensation in the most serious cases of motor finance misselling.
The Supreme Court on Friday overturned most of a lower court ruling that last year had sent shares in affected banks spiralling. The decision also throws into uncertainty a compensation program that analysts previously estimated would cost the banks tens of billions of pounds.
The Financial Conduct Authority said it would confirm before markets open on Monday whether it would go ahead with its plans. “We will be working through the weekend to analyze the judgment and determine our next steps,” an FCA spokesperson said in a statement. “If we do decide to propose a redress scheme, we’ll consult widely.”
The ruling was issued after the London stock markets had closed to prevent any market disruption, Judge Robert Reed said. Lloyds Banking Group Plc and Close Brothers Group Plc American depositary receipts were up more than 4% at 6:30 p.m. in London.
The court said car dealers can act in their commercial interests, and dismissed most of the arguments that dealers selling loans for the banks must obtain consumers’ informed consent to charge commission.
The dealer “was not a fiduciary: that is to say, a person entirely committed to acting in another person’s interest without any interest of his own,” Judge Reed said. “On the contrary, the car dealer was at all times pursuing its own commercial interests in achieving a sale of the car on profitable terms.”
The judges upheld one of the Court of Appeal’s rulings, saying a case brought by one of the claimants — Marcus Johnson — stood out because of several factors including the high level of commission the consumer was charged and the fact that the customer was expected to read a lengthy legal contract to understand the size of that fee. He also wasn’t told that his lender, FirstRand Ltd., had the right to refuse the loan in the first place.
“I am delighted for him,” said Kevin Durkin, a lawyer for Johnson. “It’s a really good win for the consumer because they have got an angle and a route into court now.”
Next Steps
Peter Rothwell, head of banking at KPMG, said affected banks will still need to continue preparations to compensate eligible customers. “But they can do so with greater confidence that it will focus on discretionary commission arrangements and cases where there is a breach of the Consumer Credit Act as a result of an unfair relationship, rather than all historic commissions.”
Professional services firm BDO said the judgment could still result in redress of between £5 billion and £13 billion, or more, with clarity needed from the FCA about its next steps. Before Friday’s ruling, analysts had estimated that the total bill for compensation could top £30 billion.
Close Brothers and FirstRand appealed the case to the top court after previous judges said that consumers taking out car loans without giving informed consent about commission were treated unfairly.
Close Brothers said in a statement it was considering the judgment and would make further announcements as appropriate. FirstRand did not immediately respond to a request for comment.
The Finance and Leasing Association, an industry body, said the ruling “properly reflects the role and responsibilities of dealers, lenders and customers, and it has restored certainty and clarity to the largest point-of-sale consumer credit market in the UK.”
“The FCA now has the legal clarity to continue its work to establish if a redress scheme is needed, and of course the thousands of unfounded complaints submitted to lenders by claimant law firms and CMCs can now be removed from the system,” Stephen Haddrill, director general of the FLA, said in a statement.
What Bloomberg Intelligence Says:
Lloyds and UK peers’ £1.7 billion in provisions for covering car-loan risks may be sufficient after the Supreme Court significantly narrowed lenders’ legal exposure by reining in a lower court’s findings. The ruling is a relief for the sector and allows lenders to effectively avoid a scandal that could cost as much as £30 billion.
— Tomasz Noetzel, senior analyst, banks
Photograph: Used cars for sale at Big Motoring World’s showroom near Chatham, UK, on Friday, Feb. 3, 2023. Used car prices took off in 2020 when consumers flush with lockdown cash sought used cars as an alternative to public transport. Photo credit: Chris Ratcliffe/Bloomberg