The Court of Appeal has ruled that brokers must fully inform customers about commissions when taking out car loans in a move that experts say could have wider implications for probe into the sector
The estimated £16billion cost of an alleged car finance mis-selling controversy could jump even higher after a court ruling. The Court of Appeal has ruled that motor finance brokers must fully inform customers about commissions when taking out car loans. It comes amid a wider probe by City regulator the Financial Conduct Authority into the motor finance sector.
Millions of car buyers who took out finance could be in line for compensation if the watchdog discovers “widespread misconduct”. The issue dates back to January 2021 when the FCA banned brokers who are allowed to arrange finance, including car dealers, from setting the rate of interest buyers pay. It follows evidence that the higher the rate, the more commission earned.
In January, the FCA took the unusual step of immediately pausing the deadline for finance firms to respond to customer complaints. That followed concerns they were rejecting most cases. The regulator is probing “historical motor finance commission arrangements” involving several firms.
Analysts have estimated the sector’s total compensation bill could reach £16billion, making it the costliest consumer banking scandal in Britain since the faulty sales of payment protection insurance.
The Court of Appeal’s ruling allowed three linked appeals brought by consumers.
Shares in lender Close Brothers Group dived in the wake of the outcome, and flirted with a 20-year low. The company said it intended to appeal to the UK’s Supreme Court. The group also said it would temporarily pause the writing of new UK motor finance business “while we review and implement any relevant changes to our documentation and processes to ensure compliance with these new requirements.”
Shares in Lloyds, one of a number of key providers of motor finance, also fell. Other key providers include Barclays and Santander. Lloyds said in February it had set aside £450million to cover the potential cost of the FCA probe.
The Court of Appeal said in a summary of its ruling that brokers owe a fiduciary duty to consumers, which imposes “an obligation on the part of the broker to act in the best interests of the customer and not to put themselves in a position of conflict”. This meant brokers cannot lawfully receive a commission from lenders “without obtaining the customer’s fully informed consent to the payment”, the court added.
The FCA said last month it was extending a pause to the deadline for motor finance companies to respond to complaints, and would set out the next steps in its review in May 2025.
Stephen Haddrill, director general of the Finance & Leasing Association, said: “This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority.”
Kavon Hussain, from Consumer Rights Solicitors, said: “Unknown to customers, lenders systematically incentivised car dealers acting as credit brokers to place finance with them by paying commissions that were not disclosed to the consumer. These hidden commissions paid to dealers meant that the consumer could pay anything from a few hundred pounds to many thousands extra to a lender through interest payments, for the lender to then pay this to the dealer. It was, and still is, a broken system which rewarded the lenders paying the largest commission to the ultimate detriment of the normal man in the street who went to buy a car on finance.”
Matt Britzman, senior equity analyst at investment platform Hargreaves Lansdown, said the Court of Appeal ruling “suggests the FCA could take a harsher view in its wider investigation into motor finance discretionary commission arrangements.” He added: “Lloyds has set aside £450million already, and analysts had pencilled in another around £500million for next year. But with some rumours suggesting the number could be closer to £2billion, that leaves a £1billion hole to be filled in current consensus.”
