While bank shares surge, the motor finance debacle is far from over
Shares in Close Brothers and Lloyds Banking Group surged this morning as the market opened for the first time since Friday evening’s Supreme Court ruling. While lenders may be breathing a sigh of relief, the motor finance debacle is far from over, with the court leaving the door slightly open.
The most talked about legal case this year stemmed from three individuals who brought legal action against Close Brothers and FirstRand Bank over secret commissions in their motor finance arrangements.
The cases were heard in different local English courts and didn’t become a problem for the lenders until last October, when the Court of Appeal overturned each court’s ruling, ruling that these consumers were not informed or provided consent for the lenders to make a commission on the back of their finance decision.
The Court of Appeal decision created a tidal wave for the lending industry over the last 10 months.
Shares in the likes of Close Brothers and other major lenders dropped, with most having to put millions, and in some cases billions of pounds, at stake due to the likelihood of a redress scheme.
Not surprisingly, the lenders brought the case to the Supreme Court, which went to full trial in April.
However, in a surprising turn of events, the top court broke its own tradition by handing down the ruling on Friday evening, as requested by the City regulator, to ensure markets were closed.
A partial victory
The top court had three cases to consider: Hopcraft v Close Brothers, Johnson v FirstRand Bank, and Wrench v FirstRand Bank, all of which were merged at the Court of Appeal hearing.
All three cases argued that these commissions constituted bribes and presented arguments based on the law of equity and tort law. However, at the hearing, the lenders’ barristers argued that car dealers do not owe a fiduciary duty to customers when arranging finance, a sentiment that the Supreme Court ultimately sided with.
This was a win for the lenders as their appeals against Hopcraft and Wrench were accepted and, in turn, overruled the Court of Appeal’s decision.
However, the top court added a ‘but’ to its conclusion in this case.
Each of the customers attempted to reopen their hire-purchase agreements under section 140A of the Consumer Credit Act 1974 (CCA) on the basis that they gave rise to an unfair relationship. However, it was only in the Johnson case that this claim was allowed to proceed for determination by the Supreme Court.
The Lord Justices found the Court of Appeal had made a number of errors that vitiate its decision on the issue of unfairness under the CCA. As a result, it found that the relationship between Johnson and FirstRand was “unfair” under this act and awarded the consumer his commission of £1,650.95, plus interest.
A £18bn bill
On Sunday, the City watchdog confirmed it will now consult on an industry-wide redress scheme following the Supreme Court’s ruling. The Financial Conduct Authority said it will publish a consultation by early October, with total costs expected to be between £9bn and £18bn.
The FCA stated that the Supreme Court decided that the appropriate remedy in the Johnson case was the payment of the commission. “We will consider this option alongside alternative approaches. It is unlikely that any alternative would result in higher remedies overall than full repayment of the commission. Some could lead to lower payments.”
Steven Francis, partner at Faegre Drinker, stated: “The importance of [the Johnson decision] should not be overlooked, and is likely to lead to the need for some lenders to review and assess past business practices.”
In the meantime, Katharine Harle, partner at Dentons highlighted that in respect of the Johnson case, “there will be pressure to provide a framework for unfair relationship claims rather than leave it to claims management companies (CMC) and the Financial Ombudsman Service (FOS) to work through this.”
She added that “equally the judgment gives little in the way of wider guidance and notes that these cases are very fact-specific; this means that any redress scheme would be much more challenging for the FCA to formulate.”
While Laura Bridgewater, partner at Macfarlanes added: “The upcoming judicial review in Clydesdale v FOS will now be critical. It should offer further clarity on how the CCA applies and the scope of lender obligations under FCA rules.”
“Until that is resolved, and the FCA sets out its position on any redress scheme, this is far from a settled issue,” she noted.
After losing a court battle in December to challenge a decision by the FOS regarding motor finance, Barclays (Clydesdale) went to the Court of Appeal for a hearing in June.
A judgment in the Barclays case against the FOS is expected in September.