A potentially landmark ruling in favour of car buyers in the UK Court of Appeal could prove pivotal for the entire finance industry.
The court ruled that the use of discretionary commission agreements (DCAs), which were banned in 2021, had not been properly disclosed to customers.
DCAs allow brokers, typically car dealers, to increase the interest rate on a car finance contract and in return to earn more commission from the lender. Complaints about the use of DCAs to Britain’s Financial Conduct Authority (FCA), together with customers taking lenders to court, resulted in the FCA announcing an investigation in January 2024.
At the time the FCA stated that there had been a high number of complaints about the use of DCAs prior to 2021 – the lenders had rejected most of them, arguing that they had not acted unfairly nor caused their customers loss based on the applicable legal and regulatory requirements. But on considering some of the rejected complaints the FCA found in favour of the complainants.
Meanwhile three of the court cases, against Close Brothers Motor Finance and Firstrand Bank, were merged into one appeal and on 25th October the Court ruled in favour of the complainants. It concluded that brokers should have obtained a customer’s fully-informed consent before receiving a commission from the lender, including the amount of the commission and how it was calculated, adding that this had not happened in any of the three cases.
Close Brothers, which saw its share price slide by 15% following the judgement, immediately announced its intention to appeal to the Supreme Court, but also paused new finance business while it considered the implications of the ruling.
The company stated that the financial impact of the case that went against it in isolation would not be material to the Group. “However, subject to the appeal to the UK Supreme Court, the judgment may set a precedent for similar claims, which may (depending on the specific facts of those cases) result in significant liabilities for the Group,” the statement added.
Commenting on the decision Stephen Haddrill, Director General of the Finance & Leasing Association, described it as a significant and unexpected judgment, “the implications of which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the Financial Conduct Authority.”
The FCA had intended to report in September but extended its investigation until May 2025, so that it could await the outcome of any relevant legal cases. Reacting to the ruling it said it had noted the decision and was carefully considering it.
The full effect of the decision will likely not become clear until after the FCA reports, but the prospect of a widespread customer compensation scheme at major cost to lenders is looking increasingly likely.
