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Shares in Close Brothers fell more than 15 per cent on Friday after the Court of Appeal sided with consumers who complained of “secret” commissions paid to dealerships when they took out car loans.
In a landmark ruling that could open the door to more demands for compensation from lenders, senior judges found that dealerships owed a “fiduciary” duty to consumers taking out motor loans, meaning they had to act in their best interests.
Close Brothers said it had temporarily paused the writing of new motor finance business while it reviewed its processes in light of the judgment, which it intends to appeal to the Supreme Court.
Lenders are already under scrutiny from regulators over car finance lending practices. The UK financial regulator is at present investigating potential mis-selling in the car finance industry, linked to historic discretionary commission agreements on car loans, a practice that was banned in 2021. Analysts estimate that lenders could be forced to pay out as much as £16bn in redress.
The Court of Appeal was asked to rule on payments that lenders made to dealerships, after several claims brought by consumers in the county courts. The customers complained that dealers who offered to arrange financing were being paid by banks without their knowledge through “secret” commission payments, adding they were not in a position to give fully informed consent.
In the ruling on Friday, Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said to give such consent, consumers would need to be informed about the full amount of commission paid by lenders and how it was calculated. That did not happen in any of these cases they were asked to consider.
The ruling is widely seen to set a precedent that could influence the watchdog’s decision to implement a redress scheme. The Financial Conduct Authority would “no doubt take the outcome of such cases into account when trying to determine if remediation is required and how this should be assessed”, said Gary Greenwood, analyst at Shore Capital.
Emma Deas, a partner at law firm Herbert Smith Freehills, said the ruling “has potentially significant implications for lender liability”.
“While there are aspects of the rulings which are limited to their own facts, the court’s analysis in relation to potential liability for lenders in cases where there has been partial disclosure is of particular significance,” she added, and was “likely to be of concern to lenders who have been part of similar arrangements”.
Shares in Lloyds Banking Group, which owns the country’s largest car finance provider Black Horse, fell almost 5 per cent after the ruling. The high-street lender earlier this year set aside £450mn to cover the potential impact of the probe.
Shares in Close Brothers, the most exposed lender to car finance in relative terms, have more than halved since the FCA announced its review at the start of the year, prompting the lender to embark on a restructuring plan to bolster its capital. This led to the bank agreeing the sale of its wealth management unit for up to £200mn last month.
The FCA said last month it was extending the pause it has imposed on compensation claims by customers seeking redress on car financing costs — designed to allow time for court rulings in landmark cases involving Close Brothers and Barclays.
It said: “The extended pause allows us time, if necessary, to introduce an alternative way of dealing with DCA complaints, such as a consumer redress scheme. It is too early to say if we will intervene in this way, but based on our work so far, it is more likely than when we started our review.”