A landmark court decision could see lenders foot a £30bn compensation bill, potentially leading to millions of motorists being eligible for a payout
A crisis facing the UK’s car finance market is looming as a crucial court decision over the potential mis-selling of loans could see lenders foot a £30bn compensation bill, and send shockwaves across the industry (Image: © 2024 PA Media, All Rights Reserved)
The UK’s car finance market is on the brink of a crisis as a pivotal court decision could result in lenders facing a £30bn compensation bill for potential mis-selling of loans, causing a major shock to the industry.
Experts have suggested that potentially millions of motorists could be eligible for a payout if the Supreme Court upholds a landmark ruling on hidden motor finance commission arrangements next year. The judgment, made by the Court of Appeal in October, deemed it unlawful for car dealers to receive commission from lenders without the customer’s fully informed consent.
This means customers should have been clearly informed about the commission dealers would earn and agreed to it. This ruling has opened the door to a potential surge of complaints from motorists who believe they may have been mis-sold car finance in previous years.
As the industry awaits the Supreme Court’s decision to uphold or overturn the judgment, the Financial Conduct Authority (FCA) is separately investigating whether there was widespread misconduct in the motor finance market and how affected consumers should be compensated.
Benjamin Toms, a banking analyst for RBC Capital Markets, stated that if the court ruling is upheld, depending on the specific judgment, there could be more complaints brought to court.
The FCA, in a stark warning to the Supreme Court, has revealed that nearly 99% of approximately 32 million car finance agreements from 2007 to 2021 involved broker commissions. “What they’re saying, without being explicit, is if you make the wrong decision in this case, that’s a lot of court cases you’re going to have to hear,” commented Mr Toms.
He also voiced concerns about the wider implications, noting that a judgment here could extend to other financial products linked with commission payments. With imminent danger for financial services, banks could be facing a whopping compensation payout that RBC analysts estimate at around £33bn and, not far behind, Moody’s poses a similar forecast with potential costs of £30bn.
Gurpreet Chhokar from Which?, said: “It’s clear that there could be millions of motorists who will be entitled to compensation as a result of some finance lenders charging customers commission without their informed consent.”
Following a pivotal Court of Appeal’s verdict against burying commission details in the fine print, the stage is set for monumental change, pending the Supreme Court’s agreement – permission to appeal has already been granted.
“It could include, for example, broker agreements between insurers and customers who pay for motor and home insurance monthly and therefore pay interest.”
She suggested that consumers should seek advice “sooner rather than later” if they believe they have been affected. Currently, banks are left hanging as they await the court’s verdict and the FCA’s plans for potential compensation.
Lloyds’ chief executive, who earlier this year announced a £450 million reserve for potential compensation costs, highlighted the uncertainty as one of the industry’s biggest challenges. Charlie Nunn stated at a conference earlier this month: “We absolutely think the industry, regulators and the Government are going to need to come together to provide that certainty for consumers, for the car industry, and actually for the investability of the UK economy.”
The Supreme Court is set to hear the appeal, involving banking groups Close Brothers and FirstRand Bank, around March 2025, with a verdict expected later in the year.