In a landmark decision that sent shockwaves through the UK’s car finance industry, the Court of Appeal ruled on Friday that certain commission arrangements between lenders and car dealerships were unlawful. The ruling, which favored three borrowers in a test case, could pave the way for a massive consumer compensation bill, with some analysts estimating the total payout could reach £8bn to £13bn.
Unlawful Commission Arrangements
The crux of the case revolved around discretionary commission arrangements (DCAs), a practice that allowed car dealerships and brokers to set interest rates on car loans and earn higher commissions as the rates increased. The Court of Appeal judges determined that lenders should have disclosed the existence and mechanics of these arrangements to borrowers, as they constituted material information that could influence their decision to take out the loan.
According to a close source familiar with the matter, the ruling effectively means that consumers who were subject to these arrangements may be entitled to compensation, potentially having their car loans rescinded or written off entirely. The source emphasized the far-reaching implications of the decision, noting that it could impact car finance deals stretching back well over a decade.
Industry Tremors
The court’s decision sent tremors through the car finance industry, with shares in Close Brothers, one of the lenders involved in the test case, plummeting 15% in the aftermath of the ruling. The company announced it would temporarily halt issuing new car loans as it reviewed the judgment, while signaling its intention to appeal the decision to the UK Supreme Court.
FirstRand Bank, the other lender party to the case, expressed its disagreement with the findings and confirmed it would also seek to appeal. Both lenders’ moves underscore the high stakes involved and the potentially seismic impact on their businesses should the ruling stand.
Regulatory Scrutiny
The court’s decision is likely to influence the Financial Conduct Authority’s (FCA) ongoing investigation into the harm caused to consumers by commission arrangements between 2007 and 2021, the year they were banned. The City regulator has already warned car lenders to set aside funds for potential payouts and is expected to decide on further action, including a possible customer compensation scheme, by May 2025.
Consumer champion Martin Lewis drew parallels between the case and the payment protection insurance (PPI) scandal, which ultimately cost banks over £50bn in compensation. Some industry watchers believe the car finance fallout could be on a similar scale, with Lloyds Banking Group, the most exposed high street lender, already earmarking £450m for potential fines.
Industry Pushback
The Finance and Leasing Association (FLA), which represents a wide array of car lenders, has pushed back against the ruling, arguing that DCAs also allowed dealerships to offer lower interest rates to customers in certain circumstances. The industry body has called on the FCA to immediately review the court’s decision, warning of the judgment’s wide-ranging implications that extend beyond the motor finance sector.
Critics of the industry’s stance contend that the potential for consumer harm far outweighed any benefits of the commission arrangements and that lenders should have been more transparent about their practices. They argue that the court’s decision is a victory for borrowers and a necessary step towards ensuring fairer lending practices in the future.
The Road Ahead
As the dust settles on the Court of Appeal’s ruling, all eyes are now on the FCA as it weighs its next steps. The regulator has acknowledged the significance of the judgment and has pledged to carefully consider its implications.
For consumers who may have been affected by the unlawful commission arrangements, the path to potential compensation remains unclear. Much will depend on the outcome of the expected appeals and the FCA’s ultimate decision on whether to implement a formal redress scheme.
In the meantime, the car finance industry is left to grapple with the fallout from the ruling and the prospect of a substantial compensation bill. Some industry insiders worry that the additional financial burden could disrupt lending and put further pressure on businesses already navigating a challenging economic landscape.
As the legal battle moves to the UK Supreme Court and the FCA’s investigation continues, one thing is certain: the landmark ruling has the potential to reshape the car finance industry and the way lenders interact with consumers for years to come. The road ahead may be bumpy, but for borrowers seeking justice, the journey has just begun.
