The case centred on commissions paid by lenders to car dealerships, which were not fully disclosed to customers and incentivised higher interest rates on loans. The Supreme Court overturned a ruling made by a lower court last year, saying that car dealers did not owe a fiduciary duty to their customers.
While this has removed fears that the industry might have to pay tens of billions of pounds in compensation, there will still be a high price to pay, as the Financial Conduct Authority (FCA) is setting up a wide-ranging compensation scheme.
Today’s news in 90 Seconds – Monday, August 4th
Last year Bank of Ireland, which controls about 2pc of the UK motor finance market, made a provision of £143m (€164m) in its accounts for the compensation it may have to pay. That figure was unchanged in its recently published results.
After the decision on Friday, a spokesman said: “We note the publication of the Supreme Court ruling and will fully consider the detail of the judgement.” It made no further comment today.
Asked if he believes the £143m provision might now be revised downwards Diarmaid Sheridan, an analyst with Davy, said: “It’s probably a little too early to make a call on that yet, as there are a few key areas that need to be determined by the FCA before a determination on the adequacy of the provision can be determined.
“The next steps is the consultation that the FCA expect to launch by early October.”
Mr Sheridan noted that Lloyds, which has set aside £1.2bn, issued an update stating that any further provision would not be material in the context of the overall group.
Lloyds share price also rose in early trading, standing 8pc higher at one point. Close Brothers, another key player in the motor-finance sector, was up over 22pc. Barclays had a more modest gain.
The FCA has said that the industry-wide redress scheme it plans to launch will cost lenders somewhere between £9bn and £18bn.
“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 said in a statement. It warned that any estimates were indicative and could change, but described those in the middle of the £9bn to £18bn range as “more plausible”.
Lenders, including Lloyds, Close Brothers and Bank of Ireland, have set aside £2bn in total. The FCA said these firms should now refresh estimates of their liabilities, increase them where necessary, and keep the markets informed.
The regulator said the redress scheme will cover ‘discretionary commission’ arrangements, if they were not properly disclosed to customers. Agreements going back as far as 2007 are to be considered. The FCA says the public should start receiving compensation next year.
Jonathan Pierce, an analyst at Jeffries Financial Group, said in a note to clients that the Supreme Court ruling represented a “huge win” for the industry. It was “arguably common sense” that car dealers did not owe their primary loyalty to customers when arranging finance. “The outcome is better for the industry than we thought,” he added.
source