Lenders face a ‘PPI 2.0’ in claims over car finance ruling

Borrowers could launch claims totalling billions of pounds against banks for mis-sold loans such as mortgages after judges ruled that car finance providers had concealed commission payments from customers.
Lloyds Bank said on Monday that it was “assessing the potential impact” of the Court of Appeal ruling in favour of borrowers who claimed commission payments were not fully disclosed in the terms of their auto loans.
Lloyds said the judgment set “a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision”.
Shares in Lloyds Banking Group, which are listed on the FTSE 100, were down 1½p, or 2.7 per cent, to 56¼p at Monday’s close.
There is a risk that lenders will halt the supply of car finance loans for fear of being ordered to pay compensation to borrowers in the future.
MotoNovo and Honda Finance Europe both said on Monday that they have halted all new car loans, while Close Brothers said on Friday that it had paused new business activity.
In February, Lloyds set aside £450 million for compensation payments to borrowers who may have been extended car loans on inflated terms and fines.
Last Friday, the Court of Appeal ruled in favour of three borrowers that it was unlawful for lenders to have paid car dealers commission without the borrowers’ knowledge. The ruling could set a precedent for auto loan providers having to provide more detailed information within loan contracts.
It may also lead to a surge in claims against motor finance providers and other lenders who provide credit that involves commission payments. Some analysts have dubbed it a possible “PPI 2.0”, in reference to the huge sums lenders paid out over mis-selling payment protection insurance.
The victory for the trio, whose cases were merged earlier this year, sent shares in Close Brothers, one of the major motor finance lenders, down over 27 per cent on Friday. Close Brothers shares slid a further 7.9 per cent to 254¾p on Monday.
Close Brothers and FirstRand, another defendant in the case, intend to appeal against the ruling to the UK Supreme Court. On Monday night Santander UK said it would delay its third quarter results following the court judgement.
Analysts at Shore Capital said that the Court of Appeal judgment had “cast a longer shadow of uncertainty over the motor finance industry, which could have significant financial implications for lenders… in terms of potential redress/remediation costs.
“One outstanding question for us is whether the ruling can be extrapolated more broadly to include other lending agreements where commission is payable to a third party as an incentive to distribute a loan.
“For example, the ramifications of this could be huge if it was to include mortgage distribution, which is a largely intermediated industry, albeit there is no suggestion at this stage that this could be the case.”
Analysts at Jefferies said: “The rulings are not specific to motor finance. In theory, this might also apply to commissions paid to credit brokers in the intermediation of other financial products.”
The Court of Appeal said that lenders could be in breach of their fiduciary duty to consumers in instances of half-concealed commission payments. However, it also indicated that proving lenders had hidden commission payments from borrowers would depend on the facts of each individual case, thereby curbing the likelihood of the ruling affecting the entire car finance market.
Analysts at Jefferies said: “The bar for proving secrecy or ‘fully informed consent’ may be higher in other markets.”
The Financial Conduct Authority (FCA), the City regulator, is in the process of examining the car loan market. Friday’s court ruling is likely to influence the outcome of the investigation, which could involve the FCA ordering lenders to issue billions of pounds in compensation to borrowers. Even before the Court of Appeal ruling, there was an expectation that the outcome of the review would be damning.