In a landmark ruling in the motor finance test case, a court has firmly sided with consumers against banks and lenders, including Close Brothers.
The Court of Appeal has determined that a broker cannot lawfully receive a commission from a lender without obtaining the customer's fully informed consent regarding the payment. For such consent to be valid, consumers must be informed of all material facts that could influence their decision, including the amount of the commission and its calculation method. The judges found that this transparency did not occur in any of the cases considered.
Earlier this year, three cases were consolidated: the Hopcraft case against Close Brothers, Wrench against South African Firstrand Bank, and Johnson against both Firstrand Bank and Motonovo Finance. These claims originated from regional courts across England. The case against Close Brothers was dismissed by Kingston-upon-Hull Combined Court last year, while the other two are appealing decisions made by County Courts. In March, the Court of Appeal allowed all three cases to proceed to a joint trial in July.
Today, the court announced that it has unanimously upheld all three appeals.
### Background of the Test Case
Earlier this year, the Financial Conduct Authority (FCA) announced it would review historical motor finance commission arrangements and sales practices across various firms. The FCA is examining deals made between April 2007, when the Financial Ombudsman Service began overseeing discretionary commission arrangements, and January 2021, when this practice was prohibited. The motor finance industry has been bracing for potential compensation costs tied to this review of discretionary commission arrangements.
Lloyds, which owns the UK's largest auto lender, Black Horse, set aside £450 million in February, while Close Brothers, seen as particularly vulnerable, announced plans to strengthen its finances by £400 million in response to the investigation.
### Reaction to the Groundbreaking Decision
Close Brothers has informed its shareholders that it "disagrees with the court's extension of existing case law in this area" and plans to appeal this decision to the UK Supreme Court. The bank indicated that the financial impact of the Hopcraft case alone is not material to the Group. However, depending on the specifics of future claims, this judgment could set a precedent that might result in significant liabilities for the group.
As a result of the ruling, Close Brothers’ shares fell by nearly 25% on Friday. Over the past year, the group's shares have dropped nearly 60% due to the news surrounding the motor finance review.
Kavon Hussain, principal at Consumer Right Solicitors and advocate for the case, remarked, "Unknown to customers, lenders systematically incentivized car dealers acting as credit brokers to place finance with them by paying commissions that were not disclosed to the consumer. These hidden commissions meant that consumers could end up paying anything from a few hundred pounds to thousands more in interest payments."
Stephen Haddrill, Director General of the Finance & Leasing Association (FLA), which represents motor finance lenders, stated, "This is a significant and unexpected judgment, with implications that extend far beyond the motor finance sector, warranting immediate attention from the FCA."
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