In a dramatic turn of events, leading motor and motorcycle finance lender Close Brothers has “paused” the provision of new loans through dealerships. Its decision came as an immediate response to a recent Court of Appeal ruling on the illegality of discretionary commissions paid to dealers, to incentivise them to offer higher interest rates on arranged loans. Such unreported commissions were banned by the Financial Conduct Authority in 2021, and the FCA subsequently mounted a probe into their potential role in historic loan mis-selling.
Close Brothers isn’t the only lender involved. The Lloyds Bank Group Black Horse finance division, Santander and sub-prime specialist MotoNovo are among others who also have exposure. These issues were analysed in some detail by BDN’s On The Money column in March 2024 and have since been bubbling under.
This latest move followed a request to the Court of Appeal, after several claims brought in the county courts. Egged on by consumer rights groups, customers had complained that dealer commissions had been paid without their knowledge and they were not in a position to give fully informed consent. Senior Court of Appeal judges Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis agreed with them. Their adjudication delivered on 25 October said that, to give such consent, customers would need to be informed about the amount of commission paid by lenders and how it was calculated, which hadn’t happened in the cases reviewed.
Opinions of the verdict from lawyers with clients in the sector were characterised by remarks like “the worst possible outcome” and “significant implications for lender liability”. Freshly estimated compensation pay-outs in any redress scheme under consideration by the FCA, spanning between 2007 and the 2021 discretionary commission ban, now stand in the region of £16bn — potentially the financial services industry’s most costly burden since multi-billion settlements for mis-selling payment protection insurance.
Unsurprisingly in the circumstances, Close Brothers intends to take an appeal to the Supreme Court, while its services to dealers remain dormant and its share price valuation has more than halved. Lloyds Bank has apparently set aside £450m to cope with an unsympathetic FCA probe’s aftermath. Most disturbing for the motorcycle trade, which is already suffering a slump in showroom footfall, is the prospect of a finance famine precluding sales opportunities.