THE UK’s highest court on Tuesday (1) began a hearing to determine whether controversial car loans were unlawful, in a case that could cost banks billions of pounds in compensation.
Banks are appealing a landmark ruling by a court of appeal in November that deemed it unlawful for car dealers to receive a commission on loans without sufficiently informing borrowers.
It is estimated that millions of drivers would be eligible for compensation should the Supreme Court side with borrowers in the three-day hearing.
The loans, which were around for 14 years from 2007, incentivised car dealers to set higher interest rates in return for a bigger commission from the banks.
Britain’s financial watchdog has made the commissions illegal.
The Supreme Court will consider two cases against South African lender FirstRand bank and one against British bank Close Brothers.
Outside the Supreme Court on Tuesday, Desmond Gourde, a supervisor at a bus company, said he was there to support those who want to claim back money.
Gourde managed to receive compensation after he bought a used Honda Jazz in 2018 for more than £8,000 including interest – without knowledge of a nearly £800 commission for the dealer.
“I had no idea there was a commission. I just applied for the finance, signed the papers, but no one told me about the commission,” the 56-year-old said.
In preparation for the ruling, British banks have set aside considerable sums, including Lloyds Bank, which has earmarked £1.2 billion.
The banks declined to comment at the start of the latest hearing.
October’s ruling from the court of appeal sent Close Brothers’ shares plummeting due to the prospect of customers having to be repaid the amount of the commissions plus interest.
The judgment also hurt the UK arm of Banco Santander, Lloyds and Barclays and threw the car finance market in the UK – where more than 80 per cent of new vehicles are bought on finance – into disarray.
Close Brothers and FirstRand have set aside £165m and £140m respectively to cover potential claims – figures dwarfed by the £1.15bn Lloyds has earmarked. Santander UK has set aside £290m and Barclays, £95m.
Consumer group Which! has estimated the cost to banks could reach £16bn, while some analysts believe the figure may be even higher – with HSBC suggesting it could rise to £44bn.
The highest figures could put it on the same scale as the fallout from payment protection insurance (PPI), one of Britain’s costliest consumer scandals, according to analysts.
Kavon Hussain, a lawyer for one of the claimants, said that “when you went to buy a car, the interest rate that you paid was set by the car dealer”.
He explained that car dealers would likely have judged who could afford more or who could afford less to determine the rate.
Amid concerns over the economic fallout, the UK government made an unsuccessful attempt to intervene in the case earlier this year.
Kavon Hussain
Analysts said the Labour administration may be concerned about the impact on banks’ willingness to provide credit at a time when the economic outlook remains uncertain.
“The bigger the car dealership network, the bigger the commissions,” said Sam Ward, lead investigator at Sentinel Legal, who has worked on several of these car finance cases.
“We found one car dealership network where they got paid £39m as an advance commission before they’d sold even one car finance policy,” he said.
The Financial Conduct Authority, which banned undisclosed commissions in 2021, plans to wait for the judgement before deciding whether to start a programme for automatic compensation.
In court filings, the FCA’s lawyers said the Supreme Court’s eventual ruling “will inform any steps taken by the FCA across the market, which is estimated to be worth approximately £40bn per annum.”
It added: “The sweeping approach of the Court of Appeal in – effectively – treating motor dealer brokers as owing fiduciary duties to consumers in the generality of cases goes too far.”
The FCA had already put its consideration of a redress scheme on hold pending the Court of Appeal’s ruling, giving customers until December to lodge complaints about commissions.
Close Brothers’ lawyers said the court of appeal’s judgment if it stood would “have profound and adverse implications for the motor finance industry and customers.”
The court of appeal said in its ruling that brokers should act in their customers’ best interests and not receive a commission without obtaining their “fully informed consent.”
FirstRand’s lawyers, however, argued the court of appeal had misunderstood the role of car dealers who introduce customers to lenders.
“The dealer’s primary role is as seller of the car,” the bank’s lawyer Mark Howard said in filings. “This makes it improbable that they would undertake to act loyally to the customer in respect of the credit broking arrangement.”
Lakshmi Mittal 
