In a landmark decision in the car finance test case, a court resoundingly sided with consumers against banks and lenders, including Close Brothers.

The Court of Appeal ruled that a broker could not legally receive a commission from the lender without obtaining the client’s fully informed consent to the payment.

The court ruled that in order to obtain consent, the consumer should be told all the material facts that could affect his decision, including the amount of the fee and how it is to be calculated.

The judges ruled that this did not happen in any of these cases.

Three cases were merged earlier this year, the Hopcraft case is against merchant banking group Close Brothers, Wrench is against South Africa’s Firstrand Bank and Johnson is against Firstrand Bank and Motonovo Finance.

The claims come from regional courts in England, with the case against the Close Brothers being thrown out by Kingston-upon-Hull Combined Court last year, while the other two are appealing County Court decisions.

The three cases were given the go-ahead in March to appeal their respective courts’ decisions, and all went to a single trial at Court of Appeal in July.

Today, the court revealed that it had unanimously allowed all three appeals.

Background of this test case

At the beginning of this year, the Financial Conduct Authority (FCA) has revealed it will review historic car finance and sales commission arrangements across multiple firms.

The FCA has since confirmed that it will review transactions entered into between April 2007, when the Financial Ombudsman Service first began overseeing discretionary commission arrangements, until January 2021, when the practice was banned.

The auto finance industry braced for potential compensation charges related to this review of discretionary charge arrangements.

Lloyds, which owns the country’s biggest car lender Black Horse, made a £450m provision in February, while in March Close siblings, take note the most exposed bank in relative terms, outlined plans to strengthen its finances by £400m in response to the survey.

The reaction to the innovative decision

Close brothers informed its shareholders that “he does not agree with the court’s expansion of the existing jurisprudence in this area”. The commercial bank said it would appeal the decision to the UK Supreme Court.

The bank noted that the financial impact of the Hopcraft case in isolation is not significant for the Group.

However, subject to appeal to the Supreme Court, the ruling may set a precedent for similar claims, which may (depending on the specific facts of each case) result in significant liabilities for the group.

Close Brother’s added that it is therefore not currently possible to assess the timing, scope or amount of any potential financial impact on the group.

While Kavon Hussain, director at Consumer Right Solicitors, which brought the case to the Court of Appeal, said: “Unbeknownst to customers, lenders systematically incentivized car dealers acting as credit brokers to pay them finance through payment of undisclosed fees. the consumer.”

“These hidden fees paid to dealers meant that the consumer could pay anything from a few hundred pounds to many thousands more to a creditor in interest payments, for the latter to then pay this back to the dealer,” he added.