Finance fiasco could cost industry £30bn following landmark court ruling

The probe into historic motor finance practices by some car loan providers could cost the industry £30 billion, according to ratings agency Moody's.

The Financial Conduct Authority (FCA) was already investigating cases where car buyers were possibly overcharged for car finance through what is termed "discretionary commission arrangements (DCA)" agreed between lenders and dealership and Moody’s estimates this could cost the industry between £8bn - £21bn.

The recent October 25 Court of Appeal ruling on cases of 'hidden' commissions which upheld claimants' appeals could widen the scope of the redress costs further and could add a further £9bn - making a 'worst-case' total of £30bn in potential compensation.

The shock Court of Appeal decision ruled that it is unlawful for car dealers (acting as brokers) to receive commissions from lenders without fully informing customers.

The FCA has said plans to consult on extending the time finance firms have to respond to consumer complaints involving such ‘non-discretionary commissions’ and granting consumers more time to escalate these complaints to the Financial Ombudsman Service.

Expected to publish proposals soon, the FCA is aiming for a mid-December implementation of this extension, should it be adopted.

Since the ruling in Hopcraft v. Close Brothers Ltd, Johnson v. Firstrand Bank Ltd, and Wrench v. Firstrand Bank Ltd, the FCA said it had been actively engaging with 63 motor finance firms, as well as discussions with industry leaders, consumer representatives, and government bodies.

The FCA said it anticipated a surge of consumer complaints related to the judgment but wanted to give firms the necessary time to respond with clarity and consistency.

The FCA’s proposed extension would remain effective at least until the Supreme Court determines whether it will grant permission to appeal the Court of Appeal’s decision. Close Brothers is understood to be considering an appeal and has until November 22 to seek permission to do so.

Consumer champion Martin Lewis, commenting on the latest court ruling said: "The consumer wrongs of DCAs, with a lack of transparency about hidden cost increases and a restriction of consumer choice, are obvious. Yet mulling the Court of Appeal ruling, I find it more difficult to see the unfairness, or that redress is due, where car finance firms with fixed commission were following the regulator's guidelines.

"If it is decided redress must be due if motor finance firms didn't disclose commission, a fair test would be: was it hidden that there was commission and, most importantly, was the commission charged excessive? If not, it feels a push - even for me - that we move to a model of car finance reclaims where any commission if the amount wasn't known was unfair and should all be repaid.

"This is especially because it has to be balanced against the risk of being counterproductive to wider consumers, as at its extreme, it's a potentially existential threat to consumer lending, meaning both less availability and higher costs in future."