Banks face anxious wait as UK Supreme Court considers 'secret' motor finance commissions
British lender Close Brothers (CBRO.L), opens new tab and South Africa's FirstRand (FSRJ.J), opens new tab are seeking to overturn a landmark Court of Appeal judgment, which said brokers must have customers' fully informed consent to receive a commission from lenders.
The Court of Appeal said lenders are liable to consumers when the commission is "secret" and can be liable where disclosure of the commission is insufficient to obtain informed consent.
That October ruling sent Close Brothers' shares plummeting due to the prospect of customers having to be repaid the amount of the commissions plus interest.
The judgment also hurt the UK arm of Banco Santander (SAN.MC), opens new tab, Lloyds (LLOY.L), opens new tab and Barclays (BARC.L), opens new tab and threw the car finance market in the UK – where more than 80% of new vehicles are bought on finance – into disarray.
The Supreme Court's decision could also affect Britain's wider consumer lending sector, with lawyers warning the implications of Court of Appeal's ruling could stretch to other goods and services purchased on credit arranged by a broker.
Close Brothers and FirstRand have set aside 165 and 140 million pounds respectively to cover potential claims – figures dwarfed by the 1.15 billion pounds ($1.49 billion) Lloyds has earmarked. Santander UK has set aside 290 million pounds and Barclays 95 million pounds.
Analysts suggest the Financial Conduct Authority's looming redress scheme could leave brokers paying out tens of billions of pounds in compensation to customers - possibly approaching the nearly 40 billion pounds lenders paid for misselling payment protection insurance between 1990 and 2010.
HIGH STAKES
If the Supreme Court dismisses the lenders' appeals, "it could send shockwaves spreading far beyond just the car finance industry", said Tom Webley, a partner at Reed Smith who is not involved in the case.
"There are a wide range of businesses that provide credit through commission-earning intermediaries and all of them could be affected by this judgment," Webley added.
The three-day appeal at the UK's highest court centres on whether car dealers owe duties as credit brokers to provide information to consumers and, if so, whether that makes any commission "secret" so as to make lenders liable to customers.
The Court of Appeal said in its ruling that brokers owe a fiduciary duty to consumers, which meant brokers should act in their customers' best interests and not receive a commission without obtaining their "fully informed consent".
The Supreme Court's ruling is expected in the summer, though its potential wider significance could push a decision later in the year.
The importance of the case is illustrated by the fact that the FCA has been given permission to address the court, though an unusual application by finance minister Rachel Reeves' Treasury for permission to intervene in the appeal was refused.
The FCA had already put its consideration of a redress scheme on hold pending the Court of Appeal's ruling, giving customers until December to lodge complaints about commissions.
The watchdog said last month that it would likely consult on an industry-wide scheme to compensate customers.
($1 = 0.7729 pounds)
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