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The UK’s highest court is to hear an appeal brought by car loan providers in a landmark mis-selling case that has put the country’s financial services industry on the hook for potentially billions of pounds in compensation.
A copy of the decision, seen by the Financial Times, shows the Supreme Court has granted lenders permission to challenge an earlier ruling from the Court of Appeal, which sided with consumers who complained about “secret” commissions on car loans.
Shares in Close Brothers, one of the banks that lost in the previous ruling, rose 8 per cent after the court agreed to hear the case. Shares in Lloyds Banking Group, which owns the UK’s biggest car finance provider Black Horse, rose over 4 per cent.
The case is due to be heard by the Supreme Court between January and April next year.
The Financial Conduct Authority on Wednesday welcomed “the swiftness of the Supreme Court’s decision” given the “potential impact of any judgment”. The watchdog added that it was “considering whether to formally intervene in the case to share our expertise to assist the court on the substantive appeal”.
The judgment in October from the Court of Appeal sent shockwaves through the UK banking system by ruling it was illegal for banks to pay a commission to a car dealer without obtaining the customer’s informed consent.
The ruling increased the likelihood that banks might have to pay vast redress claims over many of the loans they provided to consumers for buying cars, a market that was worth £52bn last year alone.
The FCA had launched a review in January of discretionary commissions in car finance, which incentivised dealerships to put customers on a higher rate of interest and have been banned since 2021.
But the Court of Appeal ruling went beyond discretionary commissions to include fixed fees and meant that banks could be on the hook for redress on a much larger proportion of previous car loans.
Lenders have scrambled to update their commission disclosures in the wake of the ruling. Close Brothers paused all car lending and Lloyds temporarily suspended commission payments for new motor finance loans.
The FCA has said it is likely to impose an industry-wide redress scheme to deal with a deluge of complaints from tens of thousands of people who borrowed to buy a car in recent years.
The Financial Ombudsman Service said on Wednesday it expected to receive more than 47,000 complaints about car finance in the year to April, nearly four times the level of last year.
Stephen Braviner Roman, the FCA’s general counsel, told MPs on Tuesday that the nature of any redress scheme was “one of the issues we will have to deal with”, though it would wait for the Supreme Court to provide legal clarity.
He said the FCA would have to decide between a system-wide scheme in which lenders proactively offer compensation to all eligible customers or a complaints-led one in which people must proactively seek redress.
Lloyds had already booked a £450mn provision to cover potential future redress costs before the Court of Appeal judgment while Close Brothers launched a £400mn capital plan in response.
Kevin Durkin, a director at law firm HD Law, which represented Marcus Johnson, one of the claimants in the landmark case, said: “Lenders continue to refuse to offer any form of redress payments, despite heavy criticism for their conduct from the FCA and recently from the Court of Appeal.
“A final decision from the Supreme Court should hopefully put an end to all this.”
Adrian Dally, director of motor finance at trade body the Finance and Leasing Association said: “Permission to appeal is very good news indeed. The expedited process will give the motor finance sector the certainty it needs.”
Close Brothers said it would not comment on the appeals process.
Analysts have said the car finance controversy has parallels with the payment protection insurance scandal that ended up costing banks £50bn. Moody’s analysts estimated total redress costs for car finance companies could reach as much as £30bn.
Lawyers have also said the Court of Appeal ruling exposed other areas of UK consumer finance in which intermediaries are paid “secret” commissions to potential legal challenges from customers.
This article has been updated since publication to correct the details of the Supreme Court hearing next year.