The supreme court has granted permission for two car lenders to appeal against a landmark ruling on motor finance commission payments that has left firms fearing a potential £30bn compensation bill.
The decision gives Close Brothers and the MotoNovo owner FirstRand a chance to overturn a shock ruling by the court of appeal in October which said that paying “secret” commission to car dealers – without disclosing the sum and terms of that commission to borrowers – was unlawful.
The court of appeal decision went beyond existing City regulations and investigations by the Financial Conduct Authority (FCA) and opened the door to a fresh flood of claims that the rating agency Moody’s says could now cost lenders up to £30bn.
News that the supreme court had accepted the case bolstered motor lenders’ shares. Close Brothers jumped as much as 8% while Lloyds Banking Group, which owns the Black Horse car loans business, rose 4%, and Barclays gained 1.6%.
The supreme court has not yet set a date for the hearing, but said it would take place by the end of the next legal term, 16 April 2025. That could lead to a decision by summer or autumn next year.
The relatively quick turnaround follows a pleading letter from the FCA, which has been asking for an expedited hearing that could put an end to uncertainty for lenders and consumers.
“We previously wrote to the supreme court asking it to decide quickly whether it will give permission to appeal and, if it does, to determine the substantive appeal as soon as possible,” the FCA said on Wednesday. “This is because of the potential impact of any judgment on the motor finance market and the many consumers who rely on it. We are considering whether to formally intervene in the case to share our expertise to assist the court on the substantive appeal.”
The Financing and Leasing Association lobby group – which represents car lenders ranging from big banks such as Lloyds and Barclays to the finance arms of carmakers including Ford and Volkswagen – welcomed the supreme court’s decision to hear the case. Its director of motor finance, Adrian Dally, said: “Permission to appeal is very good news indeed. The expedited process will give the motor finance sector the certainty it needs.”
However, it is still unclear whether all car finance claims currently listed in the county courts will be paused.
A spokesperson for FirstRand’s UK lender, Aldermore, which runs MotoNovo, declined to comment. Close Brothers said the lender “will not be commenting further on an ongoing appeals process, and any further announcements will be made as and when appropriate”.
The FCA has been trying to get a grip on the flood of claims hitting motor lenders. The regulator has already put a pause on complaints about discretionary commission arrangements (DCAs), which gave car dealerships and brokers the power to set interest rates on car loans, and be paid higher commission as that number grew. The practice was eventually banned by the FCA in 2021, amid concerns it was incentivising dealers and brokers to hike costs for consumers. The FCA is expected to institute a pause – which could last as long as 12 months – on complaints related to the October court ruling by next week.
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But until the FCA investigation and the supreme court ruling come to a close, it is unclear just how costly the issue could end up being for lenders, who are likely to have to pay out tens of billions of pounds to their borrowers.
On Tuesday, the FCA’s top lawyer, Stephen Braviner Roman, gave the biggest indication yet that the car finance commission controversy could start to rival the scale of the payment protection insurance (PPI) scandal, which cost banks £50bn. He told MPs on the treasury committee: “We’ve previously said that, looking at DCAs alone, we do not think it’s the scale of PPI. But that was when we were looking at DCAs alone. So I think it would be premature to say it’s definitely not the scale of PPI now.”
The FCA’s chief executive, Nikhil Rathi, attempted to backpedal on those comments during an appearance on Martin Lewis’s Money Live show hours later. Rathi said: “It’s more likely that there will be a redress scheme [set up by the FCA] than when we started this work … I wouldn’t necessarily say it’s going to be as large as PPI. We’re going to have to see what the courts say, and then come to a view.”