Motor Dealers to Shoulder £16B in Car Finance Claims Amid Appeals Court Decision

On October 25, 2024, the Court of Appeal announced its ruling regarding motor dealers’ fiduciary responsibilities regarding car finance claims in the Johnson v Firstrand Bank Ltd., Wrench v Firstrand Bank Ltd., and Hopcraft v Close Brothers Ltd. consolidated cases. The decision is expected to result in up to £16 billion in car finance compensation claims, agitating the motor finance market. The Financial Conduct Authority (FCA) urges industry players to coordinate with them in light of the possible impacts of the ruling to their business. 

According to the court, the dealers served as middlemen between clients and motor lenders, making them responsible for providing financing options that suit customers best. 

This puts into question the fact that dealers received partially disclosed commissions from lenders, making the former liable for failing to perform their fiduciary duties and the latter accessories, under the Consumer Credit Act of 1974 and the Financial Services and Markets Act of 2000. 

It also places customers in the position of possible recipients of mis-sold car finance. 

Major lenders reassess compliance, paused new financing services

The car finance sector, particularly lenders and dealers, responded sharply to the news by reassessing their compliance with policies in a move to meet disclosure standards. 

Both defendants of the three key cases, MotoNovo (also known as FirstRand Bank) and Close Brothers, put a temporary halt to their financing services as they aligned their protocols with the newly set rules. Honda took a similar stance. 

Some players expressed disappointment in the ruling, saying that it puts them in a difficult position. Close Brothers emphasized the negative impact of the decision, expressing that the ruling sets a higher set of standards than the existing ones enforced by the FCA, including at the time of the case.

Lloyds Banking Group and Santander UK Group made similar remarks, with the latter deciding to postpone the release of Q3 results to evaluate potential liabilities as an impact of the ruling. This ruling reevaluates how lenders ought to proceed when transacting with clients. 

Apart from their commissions, lenders and dealers are likewise urged to disclose the amount and nature of their lending practices, thereby changing current industry practices and reshaping the trajectory of car finance claims, the risks associated with it, and the internal controls that define it. 

FCA takes time to review responses, rethink regulatory compliance measures

From its initial eight-week review of complaint responses regarding the discretionary commission agreements (DCA), the FCA extended its review period until December 2025. 

DCA positionings have been the priority of the FCA’s review, allowing lenders and dealers to increase interest rates and earn higher commissions. This extended period gives the organization the opportunity to reassess how lenders and dealerships alike can take on a more transparent and proactive approach. 

This likewise provides the FCA with adequate time to determine how the ruling affects consumer protection rights, particularly under laws such as the Consumer Rights Act 2015. 

The FCA’s pause in its eight-week review period highlights the agency’s issues on garnering fairness for its consumers and overall regulatory compliance. 

Lenders and agencies should enforce a more stringent approach in implementing previous guidelines in place should the Court of Appeal’s decision hold steadfast, bringing about higher operational costs and undertakings compliance-wise. 

FCA Chief Executive Nikhil Rathi stressed the importance of firms quickly undertaking such measures in accordance with the law to ensure fairness for consumers against mis-sold vehicle finance measures. 

FCA chief doubles down on resolution, urges fast appeals

Rathi publicly addressed the issue, prodding the Supreme Court to speed up its decision regarding the appeal. In a statement, the FCA chief executive said that the Supreme Court’s decision would greatly affect the public’s best interest. Rathi also encouraged the Supreme Court to provide clear parameters and to address the issue swiftly. 

Rathi likewise maintained the FCA’s commitment to upholding fair consumer practices while keeping the market stable. 

The chief executive magnified the need for the FCA to work closely hand in hand with the Financial Ombudsman Service and other relevant government agencies to further evaluate the consequences of the ruling on a broader scale, especially given that the vehicle finance industry produces over two million vehicle purchases in the UK alone. 

This forward-looking proposition hopes to answer current consumer concerns surrounding car finance claims and make the requisite adjustments needed within the lending industry. 

FCA considers complaint pause, seeks to encompass varying commission categories

The public has called for the eight-week pause to be expanded, considering the broader legal implications of the ruling. Although the pause on DCA complaints has already been extended until December 2025, prolonging this may further delay how the agency could remedy the situation. 

Although Rathi acknowledges the lending industry’s desire for more time in addressing the matter, he also noted that the Court of Appeal levied new legal precedents the agency must follow. Close Brothers said that it is possible the ruling may set a precedent for similar cases, bringing about increased liabilities. 

Lenders are obligated to address complaints promptly and as per the law under Section 138D of the Financial Services and Markets Act 2000, unless the Supreme Court imposes a different judgment. Given this, the FCA seeks to examine the possibility of extending the current pause while allowing consumers to obtain fair treatment in car finance claims. 

Court ruling implications brings in new era for car finance claims, consumer finance

The ruling bears significant ramifications for the financial industry, with respect to the requirements and the common law fiduciary principles set forth in the Consumer Credit Act 1974. This boosts consumer safeguards in terms of commission transparency and is capable of changing existing practices across industries such as insurance, retail finance, and mortgages. 

On November 12, 2024, the FCA is slated to speak at the Claims Futures conference to tackle consumer outcomes and compliance issues. 

Due to this ruling, major lenders in the industry are expecting to see a rise in claims, leading Honda and MotoNovo to modify existing policies to comply with the new fiduciary standards. To reduce the risk of vehicle finance mis-selling claims, the judgment urges lenders to modify their disclosure processes. 

The FCA seeks to provide a more supportive environment that upholds transparency and resiliency as it teams up with the financial services arm and the government in fixing the vehicle finance issues while also prioritizing consumer rights action. 

With the FCA on the standstill as it waits for the Supreme Court ruling, lenders are set to uphold more rigorous compliance measures on car finance claims. The recent ruling emphasizes consumer protection and commission disclosure, necessitating transparency. 

As stakeholders charge ahead to comply with the new regulations, the FCA points out the need to strike a balance on meeting consumer interests and market stability. By providing extensive assistance, the FCA guarantees consumers affected by mis-sold vehicle finance that they can seek proper compensation and refunds, while preserving legal business practices in the industry.