Two big auto lenders have been authorised by the Supreme Court to challenge a historic decision that might lead to a £30 billion compensation cost. Owning the MotoNovo car finance company, Close Brothers and FirstRand now have the chance to contest an October Court of Appeal ruling that seems dubious. The decision said paying “secret” commissions to vehicle dealers is illegal without revealing the terms or amount to borrowers.
The Court of Appeal’s ruling, which is shaking the car loan sector, transcends current rules and the Financial Conduct Authority’s (FCA) investigations. Global rating agency Moody’s has cautioned that the ruling may allow a tsunami of fresh claims into the system, possibly costing lenders up to £30 billion.
How does the Supreme Court's ruling affect the shares of motor lenders?
The Supreme Court’s decision to consider the case boosted motor lenders’ shares. While Lloyds Banking Group, which owns the Black Horse vehicle loan company, surged by 4%, Barclays climbed by 1.6%, and Close Brothers saw its stock soar by 8%.
The ruling’s full financial consequences are unknown, though, and the FCA and the motor financing industry are anxiously awaiting the result of the forthcoming Supreme Court hearing.
For the Sector, What Does the Expedited Legal Process Mean?
Although the hearing date is unknown, the Supreme Court has confirmed that it would occur before the end of the judicial term, April 16, 2025. This chronology might result in a decision by the summer or autumn of next year. The accelerated hearing tracks a formal request made by the FCA, eager to clarify the matter’s ambiguity.
The FCA said in a statement: “We previously wrote to the Supreme Court requesting it to decide quickly whether it will grant Permission to appeal and, if it does, to determine the substantive appeal as soon as practicable. This is so because of the many consumers depending on the auto finance sector and the possible influence of any decision on it. We are debating whether to formally intervene in the matter to provide our knowledge to help the court with the substantive appeal.”
Why Would Industry Groups Support the Appeal?
The decision was hailed by the Financing and Leasing Association (FLA), which stands for a broad spectrum of automotive finance providers, including big banks like Lloyds and Barclays and automakers’ finance arms like Ford and Volkswagen. Director of Motor Finance at the FLA, Adrian Dally, expressed hope about the faster procedure: “Permission to appeal is extremely excellent news indeed. The accelerated process will provide the automobile finance sector the certainty required.”
Though this is encouraging, it is unknown if the flood of cases already brought before county courts will stop once the legal system runs through.
How is the FCA handling the claim surge?
The FCA has been trying to control the flood of claims against motor lenders, particularly regarding discretionary commission arrangements (DCAs). These agreements let vehicle dealerships and brokers establish loan interest rates; higher rates would result in bigger commission payouts. The practice—which the FCA outlawed in 2021—was judged to have encouraged brokers and dealers to raise consumer prices.
The FCA has stopped complaints about DCAs previously; it is expected to stop complaints resulting from the October Court of Appeal verdict as well. This stop might last up to 12 months, giving lenders under increasing strain from claims some temporary relief. Nevertheless, once the Supreme Court renders its decision, the case’s possible financial influence is yet to be discovered.
Could the Car Finance Commission produce a rival PPI scandal scale?
The chief attorney of the FCA recently said that the scope of the car financing commission issue could be comparable to the £50 billion payment protection insurance (PPI) scam, which affected banks. He informed MPs: “We do not believe the size of PPI based just on DCAs alone. That was the case, nevertheless, while we were considering DCAs by themselves. Therefore, I believe it would be premature to declare that PPI’s current scale is absolutely not the scale of choice.”
Later that same day, the top executive of the FCA seemed to back down on these remarks. He said, “It’s more likely that there will be a redress system [established by the FCA] than when we started this job [than]. It would be as big as PPI. We are smaller than waiting to form an opinion until seeing what the courts say.
For motor lenders and borrowers, what is the future ahead?
Although the FCA keeps a close eye on the matter, it still needs to be discovered how expensive the verdict and following claims will be for motor lenders. Should the case finally lead to a comprehensive compensation plan, lenders could be obliged to pay tens of billions of pounds to their borrowers. With the protracted legal process, the possible financial repercussions leave lenders and consumers uncertain while they wait for a Supreme Court ruling.
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