A court decision that might result in drivers receiving refunds for their auto financing deals "extends too much," according to the United Kingdom's financial regulatory body. Supreme Court .
FirstRand Bank and Close Brothers, two lending institutions, are contesting a decision that might result in numerous car buyers being eligible for refunds due to not having been informed about commissions received by dealerships as part of their financing arrangements.
The lenders are contesting a Court of Appeal decision made last year in support of car purchasers Andrew Wrench, Marcus Johnson, and Amy Hopcraft. This could lead to one of the largest consumer compensation programs since the PPI scandal.
Finance companies have unexpectedly received support from the Financial Conduct Authority. FCA ), which was given permission to intervene in the case - something Rachel Reeves was refused when she attempted to do so in January.
The significant judgment was reached following three car buyers separately taking their financing companies to court upon discovering that the dealers who sold them vehicles had received additional payments for steering them toward these financial arrangements.
In one case, the driver had even been put onto a deal where the amount of interest was directly influenced by the interest rate - a now-banned practice known as a discretionary commission arrangement.
The Court of Appeal found that 'secret' commission payments to dealers were unlawful without the car buyer's consent and ruled that the trio - Marcus Johnson, Andrew Wrench and Amy Hopcraft - should receive compensation.
But the lenders are challenging the ruling at the Supreme Court, with lawyers for FirstRand telling justices that the decision was an 'egregious error'. All three motorists oppose the case.
In its uncommon intervention, the FCA stated that asserting car dealers have a 'fiduciary duty' towards buyers—that they must act in the customers' best interest—extends beyond what is reasonable.
In a written statement, Jemima Stratford KC from the FCA commented: The FCA argues that motor dealer brokers generally do not have fiduciary responsibilities.
'Treating all motor dealer brokers as fiduciaries would be too sweeping an approach.'
The FCA will be looking to protect the lending industry in order to protect it from complete collapse. HSBC estimates that the total industry-wide impact of a redress scheme could be £44billion.
It said in a letter to the Supreme Court last year that almost 99 per cent of the 32 million finance agreements entered into since 2007 paid commission to brokers such as car dealers.
Lloyds Bank, which finances cars through its Black Horse Finance subsidiary, has set aside around £1.2billion to settle compensation claims.
'The bigger the car dealership network, the bigger the commissions,' said Sam Ward, lead investigator at Sentinel Legal, who has worked on several of these car finance cases.
'We found one car dealership network where they got paid £39 million as an advance commission before they'd sold even one car finance policy,' he told AFP.
The Treasury, the Finance and Leasing Association and Consumer Voice, a customer rights group, had requests to intervene in the case rejected. The National Franchised Dealers Association had a request approved.
Consumer Voice claimed more than four in 10 drivers who bought a car on finance in the last four years did not know if their dealer received commission.
Mr Johnson, Mr Wrench and Ms Hopcraft all used car dealers as brokers for car finance arrangements for second-hand cars, all worth less than £10,000, before January 2021.
In 2014, Ms Hopcraft, who was still a student nurse at the time, purchased her new vehicle via an arrangement with Close. This deal resulted in the company paying the car dealership £183.26 as commission.
Mr. Wrench, characterized by the Court of Appeal as a "mail carrier fond of speedy vehicles," entered into two lease agreements for an Audi TT coupe and a BMW 3 Series from FirstRand in 2015 and 2017, respectively, accruing substantial amounts in commissions overall.
Last year, he told MailOnline: "Those who know me understand this wasn't about financial gain. It was about principles, accountability, their deception, and dishonesty. I feel very proud."
In 2017, when Mr. Johnson was serving as a factory supervisor, he bought his first vehicle and paid £1,650.95 in commissions as part of the financing arrangement with FirstRand for the Suzuki he acquired.
Once the allegations progressed to the Court of Appeal, three high-ranking judges determined that the creditors must reimburse the drivers for the commissions because there had been ‘no disclosure’ regarding these charges in Ms Hopcraft’s instance and only ‘inadequate disclosure’ in Mr Wrench’s situation.
Lady Justice Andrews, Lord Justice Birss, and Lord Justice Edis stated that although every case has its distinctions, merely embedding such a declaration within fine print that the lender realizes the borrower would very likely overlook does not constitute sufficient means to adequately notify a driver regarding the commission.
However, in written statements submitted ahead of the hearing scheduled for Tuesday, Mark Howard QC, representing FirstRand, stated that the Court of Appeal’s decision was both ‘unprecedented’ and ‘a significant shock to the industry,’ further noting: ‘There seems to have been an error.’
He said FirstRand did not owe a duty to Mr Johnson or Mr Wrench as they 'never undertook to act loyally on their behalf', and that it was 'highly improbable' that they would do so.
In their written submissions for Close, Laurence Rabinowitz KC argued that the judgment might permit individuals to avoid car agreements without demonstrating that those contracts were unjust.
Outside the Supreme Court on Tuesday, Desmond Gourde, a supervisor at a bus company, told the AFP news agency that he was there to support those who want to claim back money.
Gourde managed to receive compensation after he purchased a used Honda Jazz in 2018 for more than £8,000 including interest - without knowledge of a nearly £800 commission for the dealer.
"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 said.
The hearing before Lord Reed, Lord Hodge, Lord Lloyd-Jones, Lord Briggs and Lord Hamblen is due to conclude on Thursday, with a judgment expected in writing at a later date.
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