A fight over UK motor finance and whether lenders should be on the hook fo
r billions of pounds in compensation will play out at the Supreme Court in one of the most highly-anticipated hearings in years.
At stake, the scope of a huge compensation program for consumers who too
k loans to buy cars without knowing about the commission paid by lenders to dealers. Banks are bracing
for a payout that could run as high as £38 billion ($49.1 billion) according to some e
stimates, if the top court’s judges rule against them. Investors are taking note.
In an unusually swift timeframe for the country’s top court, a panel of five judges will sit for three days this week to hear an appeal bro
ught by Close Brothers Group Plc and South Africa-based FirstRand Ltd.
The hearing will take place less than six months after a lower court effectively r
ipped up historical consumer finance practices by declaring it unlawful for banks to pay commission to a car dealer without obtaining the customer’s informed consent.
The Close Brothers Group Plc headquarters in London. Photo credit: Jose Sarm
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ento Matos/Bloomberg
Rulings in this case have shaken investors. Close Brothers shares have los
t two thirds of their value since the first customers lodged appeals in July 20
23, and banks including Lloyds Banking Group Plc have set aside increasing sums for a redress program.
Lloyds, the UK’s largest provider of car finance, has earmarked £1.15 billion so far for any potential payouts, while the UK arm of Spa
in’s Banco Santander SA has put aside £295 million. Close Brothers, where one-fifth of the loan book is dedicated to motor fina
nce, set aside a first-half provision of £165 million for the matter.
Depending on how broadly the compensation requirements are set, banks could face an overall bill of between £24 billion and £38 billion, analysts at Bank of America have estimated.
Dubbed “PPI on wheels,” the fallout has provoked comparisons with mis-sold payment protection insurance — the UK’s most expensive consumer scandal to date where around £50 billion was ultimately paid out.
The Financial Conduct Authority (FCA), which has been reviewing car finance since the start of last year, said it’ll decide whether to implement the compensation program within six weeks of the Supreme Court’s decision.
The watchdog was granted permission to take part in the top court case, but in a blow to Chancellor Rachel Reeves, the judges refused a challenge by the Treasury, which had argued that the case risked causing considerable economic harm.
“The court’s role is to decide the law relating to secret commissions and not to consider economic outcomes,” Robin Henry, a lawyer at Collyer Bristow not involved in the case, said. “But for the FCA, this is a damage limitation exercise to protect the motor finance industry.”
