The motor finance sector faces upheaval following a court ruling on commission disclosures.
- A recent Court of Appeal decision reveals lenders didn’t fully disclose commissions to car dealers.
- Potential claims in the sector could soar, with mis-selling costs estimated up to £40bn.
- Industry leaders urge a swift Supreme Court review to clarify the ruling’s implications.
- Companies pause new finance proposals to reassess compliance with the new ruling.
Recently, the Court of Appeal delivered a verdict that has sent shockwaves through the motor finance industry. It was determined that lenders had not sufficiently disclosed commissions to car dealers, leading to concerns about transparency and informed consent. This ruling pertains to three combined cases and has the potential to trigger a vast number of claims, with industry insiders estimating the cost of mis-selling could reach as high as £40bn.
The Financial Conduct Authority (FCA) has emphasised the need for a rapid review by the Supreme Court to establish clarity on the matter. Both defendants in these cases have signalled their intention to appeal. The ruling’s implications extend beyond the ongoing FCA examination of discretionary commission agreements, which involve lenders allowing brokers and dealers the latitude to elevate interest rates—and thereby increase their commission earnings.
The decision now underpins claims relating to any undisclosed or partially undisclosed commission models, potentially reaching beyond motor finance. In response, MotoNovo Finance, affiliated with FirstRand Bank and involved in two of the cases, has temporarily halted new finance proposals to update its operational procedures, demonstrating the wider industry anxieties about compliance.
Close Brothers, another defendant, remarked on the heightened expectations for disclosure and consent that the ruling imposes. The Court of Appeal’s decision places a greater obligation on credit brokers, like motor dealers, to fully and fairly disclose commission details to customers, setting a standard higher than existing FCA rules or those in effect at the time of the alleged mis-selling.
This precedent could open the floodgates for similar claims, potentially imposing significant liabilities on financial entities. Consequently, Close Brothers and Honda have also paused their motor finance operations to ensure compliance. Similarly, Lloyds Banking Group, which plays a substantial role in the motor finance sector, expressed concerns over the new disclosure standards, which it argues were based on existing FCA guidelines and previous legal precedents.
Santander has also voiced its disagreement with the court’s decision and postponed its third-quarter results announcement as it assesses the resulting exposure for its UK operations. FCA Chief Executive Nikhil Rathi highlighted the importance of determining whether the Court of Appeal’s ruling represents the final legal position, stressing the need for market stability while safeguarding fair treatment of consumers.
Rathi further noted the FCA’s collaboration with the financial services industry, the Financial Ombudsman Service, and government bodies to explore any broader ramifications of the ruling and necessary actions. In cases involving discretionary commission agreements, the FCA has suspended the eight-week deadline for lenders to address complaints, with Mr. Rathi acknowledging calls from within the industry for this pause to extend to all commission-related complaints, weighing the potential benefits and risks carefully.
The motor finance industry is in a state of uncertainty, awaiting further legal clarification to navigate the potential impact of recent court decisions.
