By Sinead Cruise
LONDON (Reuters) – The Supreme Court of the United Kingdom will on Tuesday hear arguments to overturn a judgment that could cost Britain’s financial industry billions of pounds in fresh legal costs and potential customer compensation.
The Court of Appeal ruled in October that it was unlawful for lenders to pay commissions to motor dealers without a customer’s informed consent, triggering speculation about the nature and scale of possible remedies for affected borrowers.
Lloyds Banking Group, Close Brothers and Santander UK have together already set aside more than 1.5 billion pounds ($1.9 billion) to cover potential compensation claims.
Some analysts say the fallout could be the costliest for banks since they paid almost 40 billion pounds in compensation to customers for mis-selling payment protection insurance.
WHAT WILL THE SUPREME COURT CONSIDER?
Reviewing three earlier claims – two against South African lender FirstRand and one against Britain’s Close Brothers – the Supreme Court will decide the extent of car dealers’ legal responsibility to provide appropriate information to consumers when also acting as credit brokers.
Assuming a duty of care is owed, the court is also expected to rule whether commissions paid by lenders to car dealers were “secret” or insufficiently disclosed, and whether lenders are liable as accessories for procuring the credit brokers’ breach of duty.
If lenders are considered liable, and the relationship between lender and consumer is considered “unfair” under the Consumer Credit Act 1974, the court will decide what kind of remedy errant lenders have to make.
The Supreme Court’s judgment is expected in the summer.
WHO MIGHT BE IMPACTED?
The Financial Conduct Authority banned the payment of discretionary motor finance commissions in 2021, eliminating incentives for brokers to hike the interest rate customers pay on their motor finance loans.
But some customers say they were treated unfairly before the ban came into effect, prompting the FCA to launch a probe in January 2024 into historic potential misconduct.
If the Supreme Court rules lenders and brokers should have been more transparent about commissions, the regulator has said it will consult on the structure of a compensation scheme within six weeks.
More than 2 million people a year rely on the motor finance market to buy a car, FCA data shows.
HOW MUCH COULD BANKS HAVE TO PAY?
Only a handful of UK lenders have motor finance businesses large enough to be materially concerned about the ruling.
