UK Supreme Court Hears Case on Car Loan Practices
The UK's highest court convened on Tuesday to deliberate on the legality of controversial car loans, a case with potential repercussions of billions of pounds in compensation from banks. The hearing addresses whether it was unlawful for car dealers to receive commissions on loans without adequately informing borrowers, a practice challenged after a landmark Court of Appeal ruling in November. Millions of drivers could be eligible for compensation if the Supreme Court rules in favor of the borrowers after the three-day hearing.
These loans, prevalent for approximately 14 years from 2007, incentivized car dealers to inflate interest rates to increase their commission from the banks. The UK’s financial regulator has since outlawed these commission practices. The Supreme Court is considering two cases against South African lender FirstRand bank and one against British bank Close Brothers.
Outside the Supreme Court, Desmond Gourde, a bus company supervisor, voiced his support for those seeking to reclaim money. Gourde himself received compensation after unknowingly paying nearly £800 in commission to a dealer when he purchased a used Honda Jazz in 2018 for over £8,000, including interest. “I had no idea there was a commission. I just applied for the finance, signed the paperwork, but no one told me about the commission,” the 56-year old stated.
British banks have allocated significant funds in anticipation of potential compensation claims, with Lloyds Bank setting aside nearly £1.2 billion ($1.6 billion). The banks have declined to comment at the start of the hearing. Consumer group Which! estimates the total cost to banks could reach up to £16 billion, while other analysts, including those at HSBC, suggest figures as high as £44 billion. These higher estimates could place the scandal on par with the payment protection insurance (PPI) fallout, one of Britain's costliest consumer finance scandals.
Kavon Hussain, a lawyer representing one of the claimants, explained that car dealers determined the interest rates paid by customers, often based on their perceived ability to pay. Sam Ward, lead investigator at Sentinel Legal, noted the correlation between dealership network size and commission earnings, citing one network that received £39 million in advance commissions before selling any car finance policies.
The Financial Conduct Authority, which banned undisclosed commissions in 2021, intends to await the Supreme Court's judgement before deciding whether to initiate an automatic compensation program. The UK government had previously attempted to intervene in the case, reportedly due to concerns about the economic impact on banks' lending willingness amid economic uncertainty.
