Supreme Court battle begins over ‘secret’ car loan commissions

A landmark Supreme Court case starting today could determine whether lenders will be forced to settle a potential compensation bill running into the billions. Click on image for live coverage from 10:30am Wednesday March 2 for Day 2 .

Lenders Close Brothers, parent of Close Brothers Motor Finance, and FirstRand, which owns MotoNovo Finance, are seeking to overturn an October Court of Appeal ruling that found failing to clearly disclose commissions paid to car dealers - and failing to secure consumers’ informed consent - was unlawful.

The ruling has sparked widespread concern in an industry already under scrutiny, with the Financial Conduct Authority (FCA) already conducting a separate car loans probe.

The case, set to run for three days before a panel of judges including Supreme Court President Lord Reed, will assess whether car dealers owed a fiduciary duty to consumers and whether the non-disclosure of commissions constituted a breach of that duty.

A ruling against the lenders, upholding the findings in Johnson v FirstRand Bank Limited, Wrench v FirstRand Bank Limited and Hopcraft v Close Brothers, could open the door to massive compensation claims and reshape financial regulations across various consumer credit products.

With roughly 90% of new cars - and an increasing number of used vehicles - purchased through motor finance agreements, both lenders and dealerships alike face high stakes in the court’s final decision.

Speaking to a Vehicle Remarketing Association event last year Jonathan Kirk KC of Gough Square Chambers, who is now representing the National Franchised Dealership Association at the Supreme Court, warned that dealerships as suppliers should scrutinise their lenders’ indemnity provisions.

“I suspect that we will find - as we have found in other areas - that the issues surrounding indemnities will start coming to the fore because at some point the lenders are going to say, ‘well, we're not bearing all of this, we're going to try and pursue the suppliers under the terms of the indemnity,” he said.

The Financing & Leasing Association, which represents car lenders, has been warning the government that a massive bill could end up disrupting the market, forcing some lenders to shut up shop, offer fewer loans or raise interest rates.

Estimates from rating agency Moody’s, put total sector exposure from £8bn to £21bn, possibly rising to £30bn depending on whether and what aspects of the Court of Appeal ruling the Supreme Court validates or overturns.

Concerns over the potential financial hit to the industry prompted an application - ultimately unsuccessful - to intervene by the Chancellor Rachel Reeves who urged the court them to avoid handing “windfall” compensation to borrowers, and warning that the case could “cause considerable economic harm” underscoring the severe impact that could have on the finance industry.

The FCA, on receiving the judgment, has said it will consult on a redress scheme possibly from as early as July, and confirm the way forward by the year-end with any scheme likely to be launched in 2026.This would lenders required to contact all borrowers who meet the mis-selling criteria and offer compensation.

Close Brothers, which is the most exposed to motor finance among its peers, with about 20% of its portfolio dedicated to car loans, has put aside £165m, cancelled dividends and plans to sell off its asset management business to strengthen its finances.

Lloyds, the largest provider of motor loans through its Black Horse division, had already put aside a total of £1.2bn for potential compensation, with its latest provision contributing to a 20% drop in annual profits. Santander has provisioned £295 million for commissions paid by consumers on motor finance.

Corporate adviser BDO consider several scenarios that could lead to substantially different levels of exposure basing its calculations on the FCA’s 2019 consultation document based on over 16,000 loans and representative of 61% of the estimated £41bn UK motor finance market although noted that potential exposure will also depend on the proportion of customers coming forward for remediation.

Jyrki Kolsi, an expert economist and director at BDO told AM: “The Supreme Court ruling could fundamentally drive the scope and scale of redress required from the motor finance sector. Depending on the ruling on the correct interpretation of the law in this area, BDO estimates that the sector could face costs of more than four times greater than that implied by the FCA’s 2019 estimate of excess interest on DCA loans.”

James Evison, partner at Stevens & Bolton, added: "This is a nail-biting time for the motor finance industry. Us lawyers are very interested in the legal principles the Supreme Court is considering around commission payments. However, it is the commercial implications of the upcoming decision that will be keeping the finance industry up at night. Another PPI style compensation scheme could have seismic consequences – and not just for the industry but the wider economy too."