Britain’s financial watchdog told the UK’s Supreme Court that a landmark ruling on motor finance commissions went “too far,” as a key appeal which will inform a potentially multibillion pound consumer redress scheme began on Tuesday.
British lender Close Brothers and South Africa’s FirstRand are seeking to overturn a judgment which said brokers owe a fiduciary duty to customers and must have their fully informed consent to receive a commission from lenders.
The appeal is likely to have ramifications for Bank of Ireland, which has a 2 per cent share of the motor finance market in the UK. The bank has set aside about £143 million (€172 million) to cover a likely compensation scheme tied to the commissions.
The UK Court of Appeal ruled that lenders are therefore liable to consumers when the commission is “secret” and can be liable where disclosure of the commission is insufficient to obtain informed consent.
The Financial Conduct Authority (FCA), which has intervened in the case, is considering implementing a redress scheme which could leave brokers paying out tens of billions of pounds in compensation to customers who bought cars on finance.
The FCA’s lawyers said in court filings that the Supreme Court’s eventual ruling “will inform any steps taken by the FCA across the market, which is estimated to be worth approximately £40 billion per annum.”
It added: “The sweeping approach of the Court of Appeal in – effectively – treating motor dealer brokers as owing fiduciary duties to consumers in the generality of cases goes too far.”
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 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.
October’s ruling from the Court of Appeal 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, Lloyds and Barclays and threw the car finance market in the UK – where more than 80 per cent of new vehicles are bought on finance – into disarray.
Close Brothers and FirstRand have set aside £165 and £140 million respectively to cover potential claims – figures dwarfed by the £1.15 billion Lloyds has earmarked. Santander UK has set aside £290 million and Barclays £95 million.
If the Supreme Court dismisses the lenders’ appeals, “it could send shock waves 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.
Close Brothers’ lawyers, similarly, said the Court of Appeal’s judgment if it stood would “have profound and adverse implications for the motor finance industry and customers.”
The Court of Appeal said in its ruling that brokers should act in their customers’ best interests and not receive a commission without obtaining their “fully informed consent.”
FirstRand’s lawyers, however, argued the Court of Appeal had misunderstood the role of car dealers who introduce customers to lenders.
“The dealer’s primary role is as seller of the car,” the bank’s lawyer Mark Howard said in court filings. “This makes it highly improbable that they would undertake to act loyally to the customer in respect of the credit broking arrangement.” – Reuters
