Motor finance test cases against Close Brothers and Firstrand head to Court of Appeal

A test case containing three cases relating to motor finance commission will be heard at the Court of Appeal this week.

Three individuals are having their claims related to motor finance’s undisclosed commission heard before Lady Justice Andrews, Lord Justice Birss, and Lord Justice Edis.

The court has merged the three cases together, with one (Hopcraft) against merchant banking group Close Brothers, one (Wrench) against South African Firstrand Bank, and the final (Johnson) against Firstrand Bank and Motonovo Finance.

None of the three cases involve the Financial Ombudsman Service, as the appeals are not based on the Ombudsman’s decisions. These individuals have opted to issue court proceedings.

The claims stem from regional courts around England. The case against Close Brothers was dismissed by Kingston-upon-Hull Combined Court last year. While the other two are appealing an appeal by County Courts.

All cases were given the green light in March to appeal the decisions of their respective courts.

Starting today (Tuesday), the court needs to establish what duty (if any) is owed where a commission has been paid to a garage which has arranged for its customer to enter into a finance agreement with a finance company.

It is also expected to consider how the law relating to secret and half-disclosed commissions might apply to motor finance commission payments.

Close Brothers and Firstrand Bank will be defending the cases. Close Brothers has barrister Ian Wilson KC from 3VB leading its defence, who was instructed by partner Russell Kelsall of the law firm Walker Morris.

An update on car finance commission complaints back in May by the Financial Ombudsman Services, stated that it “recognises” that both the judicial review by Barclays Partner Finance and “the Court of Appeal’s decisions could have an impact on our approach to complaints that include similar issues”.

The case is set to run until Thursday, and it is available to watch remotely on the Judiciary’s YouTube account.

Background

At the start of the year, the Financial Conduct Authority (FCA) announced it would review historical motor finance commission arrangements and sales across several firms.

The motor finance industry has been bracing for potential compensation fees tied to this review into discretionary commission arrangements, which allowed brokers to set interest rates on car repayment plans within a range given by the lender.

The FCA has since confirmed that it would look into deals made between April 2007 – when the Financial Ombudsman Service first started overseeing discretionary commission arrangements – and January 2021 – when the practice was banned.

Analysts have estimated that the motor finance industry could be on the hook for up to £16bn in compensation payouts.

Lloyds, which owns the country’s biggest auto lender, Black Horse, made a £450m provision in February, while in March, Close Brothers, considered the most exposed bank in relative terms, outlined plans to bolster its finances by £400m in response to the probe.

Firstrand, which is South Africa’s biggest banking group by market capitalisation, said last week that its earnings in the second half of the financial year would be offset by its decision to make a provision for the FCA’s review.

The FCA is due to set out its next steps on the review in September, which will give more insight into possible compensation costs.