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Lenders across the City are breathing a sigh of relief after today’s landmark Supreme Court ruling, which upheld the appeals of two banks in the high-profile motor finance commission case.
This highly anticipated legal decision marks a significant victory for the lending sector, as the UK’s top court sided with Close Brothers and FirstRand Bank.
The Lord Justices were tasked with deciding whether to overturn a controversial Court of Appeal ruling from October, which found it unlawful for banks to pay commissions to car dealers without obtaining the customer’s informed consent.
The decision curbs a hit for the banking sector which analysts projected could cost up to £30bn.
Lord Justice Reed, President of the Supreme Court, clarified ahead of the ruling it had handed down the judgment when markets were closed for the weekend after Financial Conduct Authority (FCA) advised it risked “market disorder” if announced in regular trading hours.
He said: “The markets will need time to digest and consider its implications.”
The case stemmed from three individuals who sought legal action against the banks in different local courts across England. The cases of Hopcraft, Johnson and Wrench were ultimately merged at the Court of Appeal.
The Supreme Court found “customers claims against the lenders cannot succeed in equity or in tort”.
But the Court did rule in favour of Johnson, who will be receiving commission and interest for his case, after Lord Reed said his commission was “unfair”.
Despite the relief for Close Brothers, the upholding of Johnson’s case, which was with First Rand, suggests the door is not fully closed for motor finance complaints.
A spokesperson for the Treasury said: “We recognise the issues this court case has highlighted.
“That is why we are already taking forward significant changes to the Financial Ombudsman Service and the Consumer Credit Act. These reforms will deliver a more consistent and predictable regulatory environment for businesses and consumers, while ensuring that products are sold to customers fairly and clearly.”
Markets were shaken last October when the Court of Appeal ruled that brokers could not lawfully receive commissions from lenders without first obtaining the customer’s consent. The judges stated that consumers must be informed of all relevant facts that could influence their decision – a requirement the court determined was not met in these three cases.
Following the October ruling, Close Brothers’ share price plunged, and motor finance lenders across the sector were forced to set aside provisions amounting to hundreds of millions of pounds.
FCA to confirm on redress scheme before Monday
The Financial Conduct Authority had said if the appeal was rejected it would conduct an industry wide redress scheme, which City analysts anticipated could rival the historical PPI saga.
Following the verdict, the regulator said: “We will confirm whether we will consult on a redress scheme before markets open on Monday 4 August” in a bid to “provide clarity as soon as possible”.
“Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well, given around two million people rely on it every year to buy a car.”
The Treasury had shared worries a redress scheme could drive companies out of the market making it harder for consumers to access credit to buy cars
The City watchdog said earlier this year any scheme must ensure the integrity of the motor finance market so it works well for future consumers
Britain’s banking giants avoid a fatal blow
Lloyds Banking Group – which owns leading vehicle finance provider Black Horse – led the pack for provisions at £1.2bn. Meanwhile Santander and Barclays were on the hook for £295m and £90m.
For the past nine months, the Court of Appeal’s decision sent the market into turmoil and placed significant pressure on the government, prompting the Treasury to unsuccessfully attempt to intervene in the case.
Since the Court of Appeal’s ruling, firms have flocked away from the market. Santander announced it was spinning off its motor finance division earlier this year meanwhile specialist lender Secure Trust Bank said it would phase out the business’ loan book.
Close Brothers and the South African lender took this case to the Supreme Court, which was heard in early April. The court was asked to appeal the Court of Appeal ruling, and the Lord Justices had to determine their decision on four legal issues.
Today, the Supreme Court sided with the lenders, allowing their appeal to proceed and overturning the earlier Court of Appeal decision.