London, UK – November 8, 2023 – shares in major UK lenders surged today following a Supreme Court ruling that significantly limits teh scope of compensation payouts related to motor finance commission practices. the ruling impacts an estimated 1.1 million customers and perhaps reduces the overall cost of redress by billions of pounds.
The Financial Conduct Authority (FCA) had proposed an industry-wide redress scheme estimated to cost lenders between £9 billion and £18 billion, addressing concerns over discretionary commission arrangements used by car dealerships. these arrangements allowed dealers to increase the interest rates on car loans without fully disclosing this to customers, resulting in inflated borrowing costs.
Lloyds Banking Group, which had already provisioned £1.2 billion to cover potential claims,stated that any further provision would not be “material” in the context of its overall financial position. Lloyds’ share price rose as much as 8% in early trading on the London Stock Exchange (LSE: LLOY). Close Brothers (LSE: CBG), another meaningful player in the motor finance market, experienced an even more substantial increase, climbing over 22%. Barclays (LSE: BARC) also saw gains, albeit more moderate.
The FCA confirmed that the redress scheme will proceed, but acknowledged the Supreme Court’s decision will influence its scope.The regulator emphasized that the £9bn-£18bn estimate remains indicative and subject to change. “At this stage, we think it is unlikely that the cost of any scheme, including administrative costs, would be materially lower than £9bn and it could be materially higher,” the FCA stated. The FCA indicated that estimates in the middle of the range are “more plausible.”
Currently, lenders including Lloyds, Close Brothers, and Bank of Ireland have collectively set aside approximately £2 billion. The FCA has directed these firms to reassess thier liabilities in light of the ruling, increasing provisions where necessary, and to keep the financial markets informed of any material changes.
The redress scheme will focus on instances where ‘discretionary commission’ was not properly disclosed to customers. The FCA will consider agreements dating back to 2007, potentially impacting a wide range of car finance agreements. The FCA anticipates that consumers will begin receiving compensation payments in 2024.
Industry analysts have largely welcomed the Supreme Court’s decision. Jonathan Pierce, an analyst at Jeffries Financial Group, described the ruling as a “huge win” for the industry, arguing that it aligns with common sense – that car dealers’ primary obligation is to their business, not necessarily to securing the absolute lowest finance rate for customers.He added that the outcome is “arguably better for the industry than we thoght.”
Background: Discretionary Commission and Motor Finance
The controversy surrounding discretionary commission arrangements stems from a practice prevalent in the UK motor finance industry for over a decade. Car dealerships were often given leeway by lenders to adjust interest rates on personal contract purchase (PCP) and hire purchase (HP) agreements. This discretion allowed dealers to earn higher commissions by increasing the interest rate charged to the customer, even if the customer qualified for a lower rate. The lack of transparency regarding these commissions led to concerns that customers were paying more for their car finance than they should have been.
The FCA launched an investigation into these practices in 2019, ultimately leading to the proposed redress scheme. The scheme aimed to compensate customers who were unfairly penalized due to undisclosed discretionary commissions. The Supreme Court ruling now casts significant doubt on the scale of that compensation.
