Top UK court to rule on car finance mega-scandal — with billions at stake

CNBC

6 days ago

The U.K.'s Supreme Court is poised to deliver a long-awaited judgment on the country's multi-billion-pound car finance scandal , one which could have major ramifications across the British economy. Britain's top court is set to hand down its ruling on motor finance commissions at 4:35 p.m. London time (11:35 a.m. ET) on Friday, a few minutes after European markets close. The car finance industry has been in disarray since the U.K.'s Court of Appeal ruled in October last year that it was unlawful for car dealers to receive bonuses from banks providing motor finance without getting the customer's informed consent. The landmark judgement caught many in the industry off guard at the time — and opened up the prospect of a massive redress scheme to compensate consumers. The crisis has drawn comparisons to Britain's Payment Protection Insurance (PPI) scandal, which was estimated to have cost lenders more than £50 billion ($66.1 billion). U.K.-based lender Close Brothers and South Africa's FirstRand have sought to overturn the Court of Appeal's decision. It puts the forthcoming Supreme Court ruling in sharp focus, with millions of consumers poised to claim compensation from the banks involved. For its part, the U.K. government is thought to be closely monitoring the decision, amid fears that a judgement calling for billions of pounds in redress payments could significantly disrupt the car market. Potential costs Analysts at RBC Capital Markets recently slashed their estimates for how much the scandal could end up costing lenders. "We expect that the Court will find that the banks were liable under statute, focussing on egregious discretionary commissions, but will clear them of liability in equity and under tort," Benjamin Toms, equity analyst at RBC Capital Markets, said in a research note published Monday. "We believe this is an ideal way for this issue to be handed back to the FCA to set up a softer redress scheme," Toms said, referring to Britain's Financial Conduct Authority. As a result, analysts at RBC Capital Markets reduced their expectations for the estimated cumulative impact from motor finance redress by around 30%. They now anticipate a total sector impact of £11 billion, of which £4 billion for banks and £7 billion for non-banks. Alongside Close Brothers, rating agency Fitch previously flagged Bank of Ireland UK, Barclays, Investec, Lloyds and Santander UK as lenders that have been "significantly involved" in motor finance lending. Redress scheme Brian Nimmo, head of redress at financial services consultancy Broadstone, said the Supreme Court's forthcoming judgment could kickstart one of the country's largest-ever mass redress schemes. "The ruling should give clarity on whether discretionary commission was unlawful and also what the ramifications could be for other markets with elements of hidden commission," Nimmo said. "The FCA has already set out some of the key decisions it will make around the potential implementation of a redress scheme that would be highly complex in seeking to balance fairness for consumers and the integrity of the motor finance market," he added. The FCA, which is considering an industry-wide redress scheme, has said it will confirm whether to issue compensation to consumers within six weeks of the Friday ruling.