Lloyds is weighing up options after shock motor finance court ruling
- The court ruled that brokers owe their clients a high degree of transparency about commissions
- Close Brothers stopped writing new auto financing business last week
Lloyds is assessing the “potential impact” of a recent court ruling on a row over commission arrangements for motor finance that could have a major impact on the sector.
The Court of Appeal ruled in favor of three claimants – Johnson, Wrench and Hopcraft – on Friday in a dispute over motor finance commissions, ruling that brokers owe a high degree of transparency to customers about how these charges are calculated.
It forced Close Brothers to temporarily pause writing operations, with the ruling setting a much higher bar for client disclosure requirements.
Analysis: Lloyds Banking Group assesses the ‘potential impact’ of a recent court ruling that could lead to billions in compensation for motorists
The court said on Friday there was “not in dispute” that the commission was kept secret from the claimant in one case, while in the other two cases the claimants were not told a commission would be paid.
Judges said car dealers could only lawfully receive a commission from a lender if they received the customer’s “fully informed consent” for the payment.
Following the decision, Close Brothers Group saw its share price plummet by about a quarter as it suspended all new lending.
The FTSE 250 group warned that the judgment could set a precedent for claims leading to ‘significant liabilities’.
Lloyds, owner of Black Horse, another leading 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 wider implications, pending the outcome of the appeals. The group will keep the market informed as necessary.’
Since January, the Financial Conduct Authority has been investigating the historical sale of ‘discretionary commission arrangements’ (DCAs).
Before they were banned, DCAs allowed dealers and brokers to choose the interest rate on a car buyer’s financing agreement.
This incentivized brokers to charge customers higher rates regardless of other factors such as the value of the loan, the length of the agreement or a customer’s credit score.
Last month, the FCA extended the pause on the deadline for car finance providers to provide their final response to customer complaints regarding DCAs.
Some experts worry that delays in awarding compensation will have serious consequences for banks’ balance sheets and ability to lend money.
Stephen Haddrill, director general of the Finance Leasing Association, said last Friday’s judgment was “significant and unexpected” and would have consequences “that extend far beyond the car finance sector”.
Analysts at Shore Capital said on Monday: ‘An open question for us is whether the ruling can be extrapolated more broadly to other loan agreements that involve paying a commission to a third party as an incentive to make a loan.
‘For example, the implications of this could be huge if mortgage distribution were included, which is a largely intermediate sector, although there is no evidence at this stage that this could be the case.’
Lloyds Banking Group shares were 1.9 percent lower at 56.6p on Monday morning Close Brothers Group Shares continued their downward trajectory, falling 8.5 percent to 253p.
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