In a move that is expected to allay bank concerns on a redress plan that some analysts had warned may cost tens of billions of pounds, the UK’s top court on Friday reversed a historic decision on auto lending commissions.
The Supreme Court ruled in favor of U.S.-listed shares of UK banks, holding that car dealers who sold cars and provided financing do not owe fiduciary duties to customers and those lenders are therefore not accountable for the commission.
The Supreme Court overturned a 2024 ruling that rocked the auto lending sector and had a significant impact on the equities of the most vulnerable companies, including Lloyds and Close Brothers.
Since payment protection insurance cost bankers more than 40 billion pounds to fix between 2011 and 2019, banks were concerned that the entire compensation bill may spark the most expensive scandal in the industry.
Although the overall amount of the bill is probably going to be greatly decreased, lenders will still be subject to claims for overcharging in certain situations under a compensation plan.
The Financial Conduct Authority (FCA) stated that it would confirm before Monday’s market opening whether it will consult on a restitution plan following Friday’s decision.
The Court of Appeal “failed to understand that the dealer has a commercial interest in the arrangement between a customer and a finance company,” according to Supreme Court President Robert Reed.
Close Brothers, which filed the appeals with South Africa’s FirstRand, stated that it was analyzing the ruling and would release more information as needed.
The British finance ministry, which made an unsuccessful attempt to get involved in the appeal, stated that it will collaborate with industry and authorities to comprehend the implications for businesses and consumers.
If left unaltered, the Court of Appeal’s decision, the Treasury believed, would make it difficult for consumers to obtain auto loans and potentially discourage investment in Britain’s financial institutions, making it even more difficult to boost the sluggish economy.
FEARS EASED
Car lenders are represented by the Finance and Leasing Association, which applauded the ruling and stated that it proved the industry was still a “solid investable option.”
According to Peter Rothwell, Head of Banking at KPMG UK, “Impacted lenders should continue preparing for what is still likely to be a significant customer redress exercise early next year.”
“But they can do so with greater confidence that it will focus on discretionary commission arrangements and cases where there is a breach of the Consumer Credit Act as a result of an unfair relationship, rather than all historic commissions.”
One claimant received slightly over 1,650 pounds ($2,187.74) on the basis that his relationship with the lender was unfair, even though the Supreme Court reversed the Court of Appeal’s conclusions that the commissions in three related cases amounted to a bribe.
However, according to Reed, a dealer’s partial or complete disclosure of a commission does not always imply that a customer-lender relationship is unjust.
He stated that the FCA’s recommendation and the Supreme Court decisions were unusually rendered on a Friday afternoon after the markets had closed to avoid causing unnecessary disruption for investors.
According to Caroline Edwards, a lawyer at the legal firm Travers Smith, the ruling on unfair commissions may spark additional discussion over the scope of lenders’ responsibilities.
“This may only be the end of the beginning as far as motor finance claims are concerned,” she stated.
