The Supreme Court of the United Kingdom will on Tuesday begin hearing arguments in a case that could expose Britain’s financial sector to billions of pounds in legal costs and customer compensation claims.
The case follows an earlier ruling by the Court of Appeal, which found it was unlawful for lenders to pay commissions to car dealers without fully informing customers. That judgment has raised concerns over how much lenders may have to pay affected borrowers.
Major lenders such as Lloyds Banking Group, Close Brothers, and Santander UK have already set aside more than £1.5 billion ($1.9 billion) to cover potential claims. Some financial analysts warn this case could result in the biggest financial hit to banks since the mis-selling of payment protection insurance (PPI), which cost banks nearly £40 billion.
What Will the Supreme Court Decide?
The court will review three earlier cases — two involving South African bank FirstRand and one against Close Brothers. It will consider whether car dealers, acting as credit brokers, had a legal duty to clearly explain commission payments to customers.
If the court finds that such a duty existed, it will then decide whether the commissions were kept “secret” or not properly disclosed. The court will also rule on whether lenders should be held responsible for helping brokers breach their duties.
If lenders are found liable, the court will consider whether their relationship with customers was “unfair” under the Consumer Credit Act 1974. It will then decide what compensation lenders may owe. A final judgment is expected this summer.
Who Could Be Affected?
The Financial Conduct Authority (FCA) banned discretionary motor finance commissions in 2021. This move ended the practice of brokers raising customer interest rates to earn higher commissions.
However, many customers argue they were treated unfairly before the ban. In January 2024, the FCA launched an investigation into possible past misconduct.
If the Supreme Court rules that lenders and brokers should have disclosed these commissions, the FCA has said it will consult on a compensation scheme within six weeks of the judgment.
According to FCA data, more than 2 million people in the UK use motor finance loans each year to buy cars.
How Much Could Banks Have to Pay?
A few large lenders are most exposed to the ruling. Lloyds, Close Brothers, and Santander UK have already put aside £1.15 billion, £295 million, and £165 million respectively for possible claims.
However, analysts warn that if the court decides all commission payments need customer consent, other types of bank-broker commissions could face legal challenges.
Moody’s has estimated that the total cost to the industry in a worst-case scenario could reach £30 billion. RBC Capital Markets predicts a potential impact of nearly £18 billion in its base case estimate.
What Could Affect the Supreme Court’s Decision?
A recent case may influence the court’s thinking. In March, the Court of Appeal ruled in Expert Tooling vs Engie Power that an energy broker’s commission should have been disclosed to the customer. However, Engie was not held responsible because there was no proof of dishonesty.
Some lawyers believe banks may avoid large payouts unless claimants can prove lenders knowingly hid commission payments. Others say this case is different because Expert Tooling involved a business, not an individual consumer.
What’s Next for the Banking Industry?
Several major British banks have shown interest in mergers and acquisitions in recent months. But fears over the financial fallout of this case have slowed dealmaking.
A clear ruling from the Supreme Court, along with any details of a compensation scheme, could allow banks to release funds set aside for legal costs. Analysts say this may help revive merger activity and restore confidence in the sector.
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