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In a landmark decision in the motor finance test case, a court has resoundingly sided with consumers against the banks and lenders, including Close Brothers.
The Court of Appeal has ruled that a broker could not lawfully receive a commission from the lender without obtaining the customer’s fully informed consent to the payment.
The court ruled that in order for consent, the consumer would need to be told all material facts that might affect their decision, including the amount of the commission and how it was to be calculated.
The judges ruled that did not happen in any of these cases.
Three cases were merged earlier this year, the Hopcraft case is against merchant banking group Close Brothers, Wrench is against South African Firstrand Bank, and Johnson is against Firstrand Bank and Motonovo Finance.
The claims stem from regional courts around England, with the case against Close Brothers being dismissed by Kingston-upon-Hull Combined Court last year, while the other two are appealing an decisions by County Courts.
The three cases were given the green light in March to appeal the decisions of their respective courts, and all proceeded to one trial at the Court of Appeal in July.
Today, the court revealed it has unanimously allowed all three appeals.
The background to this test case
Earlier this year, the Financial Conduct Authority (FCA) revealed it would review the historical motor finance commission arrangements and sales across several firms.
The FCA has since confirmed that it would look into deals made between April 2007, when the Financial Ombudsman Service first started overseeing discretionary commission arrangements, to and January 2021, when the practice was banned.
The motor finance industry has been bracing for potential compensation fees tied to this review into discretionary commission arrangements.
Lloyds, which owns the country’s biggest auto lender, Black Horse, made a £450m provision in February, while in March, Close Brothers, considered the most exposed bank in relative terms, outlined plans to bolster its finances by £400m in response to the probe.
The reaction on the groundbreaking decision
Close Brothers informed its shareholders that it “disagrees with the court’s extension of the existing case law in this area”. The merchant bank said it would be appealing this decision to the UK Supreme Court.
The bank noted that the financial impact of the Hopcraft case in isolation is not material to the Group.
However, subject to the appeal to the Supreme Court, the judgment may set a precedent for similar claims, which may (depending on the specific facts of those cases) result in significant liabilities for the group.
Close Brother’s added that it is therefore currently not possible to assess the timing, scope or quantum of any potential financial impact on the group.
While, Kavon Hussain, principal at Consumer Right Solicitors, who brought the case to the Court of Appeal, said: “Unknown to customers, lenders systematically incentivised car dealers acting as credit brokers to place finance with them by paying commissions that were not disclosed to the consumer.”
“These hidden commissions paid to dealers meant that the consumer could pay anything from a few hundred pounds to many thousands extra to a lender through interest payments, for the lender to then pay this to the dealer,” he added.
While Stephen Haddrill, director general of the FLA, which represent motor finance lenders 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 FCA.”