Motor finance: Insurance industry nervously watches legal battle
As lenders brace for the start of a high-profile legal battle on Tuesday, the insurance industry lurks on the sidelines.
Merchant banking group Close Brothers and South African Firstrand Bank are headlining a case that may have enormous implications for the lending industry.
The drama stems from Court of Appeal ruling last October that a broker could not lawfully receive a commission from a lender for car finance without obtaining the customer’s fully informed consent.
The legal ruling caused a shockwave in an industry already preparing for an Financial Conduct Authority (FCA) review. Moody’s quoted a potential compensation of £30bn if the consumers are successful.
However, according to Nicola Pangbourne, a partner at the law firm Kennedys, the insurance industry is nervously watching on.
She pointed out that if the court goes against the lenders and the £30bn number is correct, “where is this money going to come from”?
“Many banks have purchased insurance policies with an element of professional indemnity cover, designed to respond to claims for errors or omissions in providing a service,” she explained.
Pangbourne highlighted that “in principle, payments of equitable compensation to consumers may be indemnifiable if the claim itself falls within the terms and conditions of the relevant policy.”
She also noted that some insurance policies may be sufficiently broad to cover the financial implications of a redress scheme.
Once the Supreme Court ruling is published, the FCA said it would publish its decision within six weeks on whether it proposes a redress scheme.
Another factor that may become problematic if the Supreme Court sides with consumers is the risk of shareholder class actions.
Following a dramatic fall in share prices, several businesses have been hit with shareholder action, including Boohoo and Entain.
This fate could follow in the motor finance fallout.
It “could lead to securities claims if investors can identify omissions in listings documents or annual reports,” Pangbourne noted.
The lawyer also pointed towards potential claims against directors for failing to act with reasonable care and skill when communicating with shareholders or for not acting within the company’s best interests.
“These are the types of claims that director and officer (D&O) policies can respond to, depending on whether the relevant Side A, Side B, or Side C coverage has been purchased as part of the lender’s policy,” she explained.
However, supposing it comes to issuing a claim with the insurers, it won’t be a simple matter; as Pangbourne noted, “whilst many lenders are likely to have policies that respond to consumer claims for compensation, this does not mean that each such policy will necessarily be engaged.”
“There are likely to be multiple issues under consideration, including whether a claim has actually arisen in the absence of a complaint, whether exposure to motor finance claims should have been disclosed or notified to insurers at renewal and the number of policy retentions that apply,” she added.