Close Brothers has stopped underwriting new dealer finance, as its share price tumbles, following a landmark court ruling which could have major repercussions for the wider motor trade.
Earlier today (Oct 25), the Court of Appeal ruled in favour of three consumers who are fighting legal cases against Close Brothers and Firstrand Bank.
The complaints say they were mis-sold motor finance but all lost previous hearings at other courts around the country.
Now, however, judges have decided to allow their appeals after ruling that ‘a broker could not lawfully receive a commission from a lender without obtaining the customer’s fully informed consent to the payment’, CityAM reports.
The judges, who unanimously voted to allow the appeals, said that that motor dealers acting as credit brokers have a ‘fiduciary duty to their customers’.
It means that the three cases, only one of which is against Close, are now set to be retried in a move which could have a major knock on effect for dealers.
After the judgement was passed down, account managers at Close Brothers are said to have immediately got to work, contacting dealers to tell them that the company will be pausing the writing of new UK motor finance business.
In a statement, the outfit said that the measure was ‘temporary’ and will be in place ‘while we review and implement any relevant changes to our documentation and processes to ensure compliance with these new requirements’.
The firm also said it disagreed with the Court of Appeal’s decision and is now planning to challenge the ruling in the UK Supreme Court.
A Close Brothers spokesman said: ‘Close Brothers Group plc notes the publication of the judgment in respect of the “Hopcraft” case, upholding the claimant’s appeal against Close Brothers Limited (CBL).
‘The case, which was initially determined in CBL’s favour, was heard in early July 2024 by the Court of Appeal together with two separate claims made against another lender.
‘Close Brothers disagrees with the Court’s extension of the existing case law in this area and intends to appeal this decision to the UK Supreme Court.
‘The court has determined that motor dealers acting as credit brokers owe both a disinterested duty and a duty of loyalty (fiduciary duty) to their customers.
‘This sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than that required by current FCA rules, or regulatory requirements in force at the time of the case in question.’
‘While the judgment is likely to extend the current period of uncertainty for the Group, we will continue to focus on supporting our customers and protecting our valuable business franchise,’ the statement added.
‘We will be temporarily pausing the writing of new UK motor finance business while we review and implement any relevant changes to our documentation and processes to ensure compliance with these new requirements.’
In the hours after the decision was made public, Close Brothers share price fell from 365.40p to 285p, before recovering slightly to 318.60p at the time of writing.
FCA is ‘carefully considering decision’
The ruling comes at an already turbulent time for the motor finance industry, as the FCA investigation into now-banned sales practices rumbles on.
The regulator recently extended the pause to the time firms have to provide a final response to customers, while it awaited the decision from the Court of Appeal.
The body has today noted the decision and says it is ‘carefully considering’ what it means for the investigation.
A spokesman said: ‘In January, we introduced a pause to the time firms have to provide a final response to customers about motor finance complaints involving a discretionary commission arrangement (DCA).
‘We did this to prevent disorderly, inconsistent and inefficient outcomes for consumers and knock-on effects on firms and the market while we review whether motor finance customers have been overcharged because of the past use of DCAs.
‘In September, we extended the pause, in part, so we could account for the outcome of legal cases that may be relevant to our review.
‘We note the Court of Appeal judgment on 25 October 2024, in Johnson v Firstrand Bank Ltd, Wrench v Firstrand Bank Ltd and Hopcraft v Close Brothers Ltd, and are carefully considering its decision.’
Meanwhile, the Finance and Leasing Association says that the ruling could have an effect far beyond the motor trade.
Commenting on the Court of Appeal decision on motor finance cases, Stephen Haddrill, Director General of the FLA, said: ‘This is a significant and unexpected judgment, the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority.’