A recent Court of Appeal ruling has sent shockwaves through the motor finance industry, with the potential for significant financial implications. In a case that could pave the way for billions of pounds in compensation payouts through car finance claims, the court sided with consumers who had previously lost their cases. This landmark decision affects finance providers like Close Brothers and FirstRand Bank, highlighting the importance of disclosure and the fiduciary duty that dealers owe to their customers.
What Is New
Car finance providers are already in the spotlight for hidden 'discretionary commission arrangements', where brokers were paid more for giving consumers a more expensive loan. Car finance providers who used a fixed commissions structure were supposedly safe from from these findings. However this ruling may change that, as the fixed commissions structure could still be used to create incentives that didn't benefit the consumer.
Key Takeaways from the Ruling
The court found that finance brokers could not legally receive a commission from lenders without customers’ fully informed consent. Essentially, motor dealers acting as credit brokers are bound by a fiduciary duty to transparently disclose any commissions they receive from finance providers. The judgment, which involved cases against Close Brothers and FirstRand, ruled that the lack of clear and informed consent constituted a breach of this duty. This could have far-reaching implications not only in motor finance but potentially in other sectors with similar commission structures.
Undisclosed Car Finance Commissions
For consumers, this ruling is a victory. Those who were previously unaware of the commissions involved in their financing arrangements now have grounds to bring claims. Claims might fall into one of three categories:
Full Disclosure: If the commission was fully disclosed to the consumer, these claims may not succeed as they meet transparency requirements.
Partial Disclosure: Where the consumer knew a commission might be involved but didn’t know the amount, they may be able to reclaim the commission amount plus interest.
No Disclosure: In cases where no information was provided about commission payments, consumers could seek more significant compensation.
Implications for the Motor Finance Sector
The financial impact on lenders could be profound. With the Financial Conduct Authority (FCA) investigating commission structures across the industry, potential liabilities could reach into the billions. The FCA has temporarily paused the deadline for complaints related to commission arrangements, awaiting this ruling’s outcome. Now, Close Brothers has paused all new motor finance deals while it reviews compliance processes and plans to challenge the ruling in the UK Supreme Court. If the ruling is upheld, it could set a precedent that reshapes commission transparency standards across the industry.
What’s Next for Consumers?
Consumers now have a unique opportunity to investigate their existing motor finance agreements. For those who suspect they may have been mis-sold finance agreements, this ruling represents a real chance to challenge lenders for fair compensation. But while this decision is monumental, it’s not the final word, as lenders are seeking to appeal. Nevertheless, consumers should gather information about their agreements and seek advice to understand their position.
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