Lending commission scandal heats up again – banks could be slammed
The UK Supreme Court has rejected a bid by the Treasury to intervene in a high-profile legal case concerning historic car loan practices, dealing a setback to Chancellor Rachel Reeves, who had argued that the lawsuit could have damaging effects on the financial sector.
The case, which revolves around claims of hidden broker commissions on car finance deals, has triggered anxiety among investors, with UK banks facing potential multi-billion-pound compensation liabilities. Last month, the Treasury warned that the lawsuit could significantly impact the economy and restrict the availability of auto loans. However, the Supreme Court declined its request to intervene, without providing a public explanation for the decision. The Treasury has yet to comment on the ruling.
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Shares in major lenders were hit hard following the news, with Lloyds Banking Group Plc seeing a decline of up to 4%, while Close Brothers Group Plc experienced a sharper drop of 15%. The broader financial sector remains on edge as the legal battle, coupled with an ongoing regulatory review, threatens to impose heavy financial penalties on affected banks.
The UK’s Financial Conduct Authority (FCA) has taken an active role in the dispute, stepping in as an intermediary between lenders and impacted consumers. Market analysts are closely watching how the FCA’s involvement might shape future compensation efforts.
“To the extent that the FCA is likely to be involved in any future redress programme, this may be seen as a positive, particularly if the FCA was to share a similar view to HMT with regard to how potential future redress should be calculated,” said Gary Greenwood, an analyst at Shore Capital. “Ultimately, the situation and potential outcome remains subject to significant uncertainty.”
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The case stems from a Court of Appeal ruling that exposed longstanding flaws in how lenders compensated brokers, potentially misleading customers who were unaware of hidden commissions tied to their car loans. The ruling found that certain lenders, including Close Brothers Group Plc and MotoNovo Finance, had not been transparent about broker fees, which often incentivized brokers to push higher-interest deals. In some cases, commissions accounted for a significant portion of a borrower’s total interest costs.
Analysts at Bank of America estimate that the overall financial impact on the industry could reach as high as £38 billion. Lloyds Banking Group, one of the biggest providers of car finance in the UK, could face liabilities of up to £3 billion and has already earmarked £450 million to cover potential compensation costs. Close Brothers recently announced it would set aside £165 million for possible payouts.
The scandal has drawn comparisons to past financial crises, including the £50 billion payment protection insurance (PPI) scandal, which saw UK banks struggle under massive compensation claims. Financial institutions are now bracing for a wave of consumer complaints, with the Financial Ombudsman Service (FOS) experiencing a surge in cases related to car finance mis-selling.
Chancellor Reeves, who has been pushing for financial regulatory reforms, has expressed concerns about the mounting volume of compensation claims. Her proposed measures aim to balance consumer protection with maintaining economic stability. These include revising the complaints-handling process, limiting the scope for appeals, and introducing fees for claims management firms filing excessive complaints.
“The FOS plays a vital role in protecting consumers, but there is a clear case for modernising its processes to ensure clarity and predictability for both consumers and businesses,” a source close to Reeves’ office stated.
The FCA has temporarily halted some compensation claims while it reassesses the regulatory framework governing broker commissions. Meanwhile, major lenders, including Barclays, are exploring legal avenues to limit their exposure, with some challenging FOS rulings through judicial reviews. However, analysts suggest that banks may struggle to overturn the decisions given the clear judicial findings on lack of transparency in broker commissions.
For the UK banking sector, the Supreme Court’s refusal to allow Treasury intervention marks another chapter in an unfolding financial saga. With billions at stake and regulatory scrutiny intensifying, the industry faces mounting pressure to address past misconduct while navigating the economic and legal ramifications of the ruling. Whether Reeves’ proposed reforms will provide relief remains to be seen, but for thousands of affected consumers, the case represents a crucial moment in holding financial institutions accountable for fair lending practices.
