UK Supreme Court Commences Hearing High-Stakes Motor Finance Case Worth Billions

A significant dispute regarding UK motor finance and the potential liability for lenders for compensation amounting to billions of pounds will be addressed in the Supreme Court during one of the most eagerly awaited hearings in years.

The outcome will determine the extent of a vast compensation scheme for consumers who secured loans for car purchases without being aware of the commissions paid by lenders to dealers. Estimates suggest banks could face payouts reaching as high as £38 billion ($49.1 billion) if the Supreme Court judges rule unfavorably against them. Investors are closely monitoring the situation.

Read: UK law firm accuses FirstRand of ‘exploitation’ in car sales commission probe

In a notably rapid timeframe for the nation’s highest court, a panel comprised of five judges will convene for three days this week to hear the appeal brought forth by Close Brothers Group Plc and South Africa’s FirstRand.

The hearing is set to occur less than six months after a lower court significantly altered existing consumer finance practices by ruling it unlawful for banks to pay commission to car dealers without securing informed consent from customers.

Developments in this case have unsettled investors. Close Brothers’ shares have plummeted by two-thirds since the initial customer appeals were filed in July 2023, leading banks such as Lloyds Banking Group Plc to allocate increasing amounts for a compensation initiative.

Lloyds, recognized as the UK’s largest car finance provider, has set aside £1.15 billion thus far for prospective payouts, while the UK branch of Spain’s Banco Santander SA has reserved £295 million. Close Brothers, with 20% of its loan portfolio dedicated to motor finance, has set aside £165 million for this matter in the first half of the year.

Read: Investec maintains R684m provision for UK motor finance investigation – for now

Depending on how broadly the compensation parameters are defined, analysts at Bank of America predict banks could incur total costs ranging from £24 billion to £38 billion.

Referred to as “PPI on wheels,” the consequences have drawn parallels with the mis-sold payment protection insurance scandal — the most costly consumer scandal in the UK to date, where close to £50 billion was ultimately disbursed.

The Financial Conduct Authority (FCA), which has been scrutinizing car finance practices since early last year, stated it will decide whether to implement the compensation scheme within six weeks following the Supreme Court’s ruling.

The watchdog was granted the opportunity to participate in the Supreme Court proceedings, but in a setback for Chancellor Rachel Reeves, the judges dismissed a challenge from the Treasury, which argued that the case could lead to significant economic repercussions.

Read: UK’s FCA to urge top court for expedited decisions on motor finance matters

“The court’s function is to determine the legal aspects concerning secret commissions, not to evaluate economic ramifications,” remarked Robin Henry, a lawyer at Collyer Bristow, not involved in the case. “However, for the FCA, this serves as a damage control strategy aimed at safeguarding the motor finance sector.”

The court typically requires a minimum of three months to deliver a decision, but it has issued rulings more swiftly in urgent situations, such as when it intervened to block former Prime Minister Boris Johnson’s attempt to prorogue Parliament after a contentious session.

The FCA prohibited discretionary commission arrangements in motor finance back in 2021, asserting that such practices encouraged car dealers to inflate a customer’s borrowing expenses.

Last year, the regulator acknowledged that auto lenders were inundated with complaints from consumers claiming their loans were structured unfairly.

Read: Close Brothers experiences significant decline after losing UK motor finance appeal

The Supreme Court is likely to examine whether the ramifications extend even further. The case initially stemmed from consumers who engaged car dealers as their credit brokers for arranging financing on second-hand cars priced below £10,000.

However, the customers were not informed of any commission payment, despite two instances where the payment was mentioned in the terms and conditions.

“The consumers received inadequate service from both the brokers and the lenders,” remarked the Court of Appeal judges. The notice of the commission payment was “hidden amidst numerous contractual documents that no one expected to scrutinize.”

Read: South African banks entangled in UK’s extensive auto finance investigation

The ruling—that motor dealers had an obligation of loyalty towards their customers—stunned the consumer finance sector and raised the likelihood that the compensation requirements might extend beyond just compensating for discretionary commissions.

The judges determined that customers entrusted the brokers to obtain a competitive agreement, which in turn created a duty of care. Almost any consumer utilizing car finance could potentially qualify for compensation under these circumstances.

“It was an unexpected verdict,” commented Alison Wilson, a lawyer at Linklaters, which is not involved in the case but is representing a significant lender. The ruling expanded the regulatory responsibilities imposed on brokers and lenders, complicating the FCA’s position, she noted. “I anticipate there will still be some pushback.”

Consequently, both Close Brothers and FirstRand have temporarily halted the initiation of new UK motor finance agreements.

For FirstRand, the outcome of the Supreme Court’s ruling may significantly affect the company’s UK operations, according to CEO Mary Vilakazi.

“It will influence how we consider lending and whether we can still achieve adequate returns,” Vilakazi shared in a Bloomberg Television interview on March 6. “If reason prevails, I believe we can navigate through these challenges and reach a satisfactory resolution. Otherwise, we may have to question our capacity to generate long-term returns.”

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