- Court rules brokers owe clients high level of transparency over commissions
- Close Brothers last week paused writing new motor finance business
Lloyds is evaluating the ‘potential impact’ of a recent court ruling on a row over motor finance commission arrangements that could have major implications for the sector.
The Court of Appeal on Friday found in favour of three claimants – Johnson, Wrench, and Hopcraft – in a dispute over motor finance commissions, ruling that brokers owe a high degree of transparency to customers over how these costs are calculated.
It forced Close Brothers to temporarily pause writing business, with the ruling setting a much higher bar for customer disclosure requirements.
Analysis: Lloyds Banking Group is evaluating the ‘potential impact’ of a recent court ruling that might lead to billions in compensation for motorists
The court on Friday said there was ‘no dispute’ that the commission was kept secret from the claimant, while in the other two cases, the claimants were not told that a commission would be paid.
Judges said car dealerships could only lawfully receive a commission from a lender if they received the customer’s ‘fully informed consent’ to the payment.
Following the decision, Close Brothers Group saw its share price tumble by around a quarter as it suspended the provision of all new loans.
The FTSE 250 group warned the judgment could set a precedent for claims that lead to ‘significant liabilities’.
Lloyds, which owns Black Horse, another prominent car finance provider, told investors on Monday that the ruling sets a ‘higher bar’ for the disclosure of such commissions than previously expected.
It added: ‘The group is assessing the potential impact of the decisions, as well as any broader implications, pending the outcome of the appeal applications. The group will update the market, if and as appropriate.’
Since January, the Financial Conduct Authority has been investigating the historical sale of ‘discretionary commission arrangements’ (DCAs).
Before they were banned, DCAs enabled dealerships and brokers to choose the interest rate on a car buyer’s finance agreement.
This incentivised brokers to charge customers higher rates irrespective of other factors, such as the loan’s value, length of agreement, or a customer’s credit score.
Last month, the FCA extended the pause to the deadline for vehicle finance lenders to provide their final response to customer complaints relating to DCAs.
Some experts are concerned that delays in awarding compensation will severely impact banks’ balance sheets and ability to lend money.
Stephen Haddrill, director general of the Finance Leasing Association, said last Friday’s judgement was ‘significant and unexpected’ and would have consequences ‘which stretch far beyond the motor finance sector’.
Analysts at Shore Capital said on Monday: ‘One outstanding question for us is whether the ruling can be extrapolated more broadly to include other lending agreements where commission is payable to a third party as an incentive to distribute a loan.
‘For example, the ramifications of this could be huge if it was to include mortgage distribution, which is a largely intermediated industry, albeit there is no suggestion at this stage that this could be the case.’
Lloyds Banking Group shares were 1.9 per cent lower at 56.6p on Monday morning, while Close Brothers Group shares continued their downward trajectory, falling 8.5 per cent to 253p.
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