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Billions of pounds will be at stake for banks this week as the UK’s highest court hears an appeal against a judgment that stunned car finance providers by ruling many of the commissions they paid to motor dealerships were unlawful.
The Supreme Court hearing, which starts on Tuesday, has wide-ranging legal ramifications stretching beyond the auto market to many areas of consumer finance. Its outcome will determine whether lenders are flooded with consumer claims seeking vast sums in compensation.
Last November, the Court of Appeal sent tremors through the UK financial services market by ruling it was unlawful for lenders to pay “secret” or partially hidden commissions to car dealerships without ensuring customers had given their informed consent.
The case was brought by a factory supervisor in Wales, a trainee nurse in Hull and a postman in Stoke-on-Trent, over second-hand cars they bought with financing from Close Brothers and MotoNovo Finance, which is part of South Africa’s FirstRand Bank.
If the judges reject the lenders’ appeal, it could upend the £40bn market for financing the 2mn cars that are bought with loans in Britain each year, and disrupt other areas such as finance for white goods. The Treasury was so concerned about the fallout that it made an unsuccessful attempt to intervene in the case earlier this year.
“This is without question one of the most significant Supreme Court cases in recent memory,” said Tom Webley, a London-based partner at law firm Reed Smith. “There are a wide range of businesses that provide credit through commission-earning intermediaries and all of them could be affected by this judgment.”
There are two crucial questions for the Supreme Court to consider in its three-day hearing before giving its judgment, which is expected by the summer. The first is whether car dealerships have a fiduciary duty to act in the best interests of their customers when arranging loans to fund their vehicle purchases.
“I am very surprised at the idea of a used-car salesman having a fiduciary duty to me as a customer,” said Martyn Hopper, a partner at law firm Linklaters specialising in financial regulation. “It seems to remove the last remaining responsibility on the part of the customer to look for the best deal.”
The second question is whether lenders paying commissions to dealerships for arranging the financing are liable for their breaches of fiduciary duty, such as failing to fully disclose the size and nature of a commission.
Julius Grower, a professor at the University of Oxford specialising in commercial law, said that if the Court of Appeal judgment was upheld on both questions by the Supreme Court, “huge swaths of contracts could, quickly and easily, be written off as ‘junk debts’”.
Banks have already been putting aside money to cover the cost of car finance redress, which some analysts estimate could end up leaving the sector facing a compensation bill approaching that of the £50bn payment protection insurance scandal.
Lloyds Banking Group, the UK’s biggest car finance provider through its Black Horse arm, has set aside £1.2bn, while Close Brothers this month booked a £165mn provision that dragged it to an interim loss. Spain’s Banco Santander took a £295mn charge and FirstRand took a R3bn ($160mn) hit.
The Financial Conduct Authority has said it was likely to impose an industry-wide redress scheme to compensate car finance customers, but the watchdog was waiting for the outcome of the Supreme Court case before deciding.
Even if the Supreme Court overturns last year’s Court of Appeal judgment, lenders will still be exposed to claims on discretionary commissions, which paid more to dealerships that put customers on a higher interest rate and have been banned by the FCA since 2021.
The FCA has been granted permission by the Supreme Court to intervene in this week’s case and it is expected to say that its rules do not assume car dealerships owe a fiduciary duty to their customers — potentially adding weight to the lenders’ appeal.
Experts think there could also be a positive read-across for lenders from last week’s separate Court of Appeal ruling involving Engie supplying electricity to Expert Tooling and paying commissions to a broker for arranging the deal.
The judges in that case cleared Engie of liability for the broker’s breach of its fiduciary duty to fully disclose the commission because the electricity supplier was not shown to have acted “dishonestly”.
Jonathan Pierce, analyst at Jefferies, said the Engie ruling “materially increases our confidence that non-disclosure of commissions in itself will not be enough to impose significant liabilities on the lenders”.
Caroline Edwards, a partner at law firm Travers Smith, said last week’s ruling had “significant implications” for the car finance appeal, adding it would also “clearly have ramifications for any FCA redress scheme, and compensation claims more generally”.
