Close Brothers Group and FirstRand Ltd. have announced plans to appeal to the UK Supreme Court after the Court of Appeal ruled against them in a landmark decision on motor finance commission disclosures.
The ruling, delivered on Friday 25 October, upheld complaints from three consumers who argued that they were mis-sold motor finance, overturning earlier judgments in lower courts.
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The case, known as the “Hopcraft” case, centres on the requirement for brokers to obtain fully informed consent from customers before receiving a commission from lenders.
The Court of Appeal determined that this did not occur in any of the three cases involved. The decision set a new legal standard for the duty brokers owe to customers, establishing a fiduciary responsibility that includes a duty of loyalty and disinterestedness. This duty requires brokers to provide greater transparency and seek customer consent on commissions, a standard that surpasses existing rules from the Financial Conduct Authority (FCA).
While Close Brothers stated that the immediate financial impact of this ruling on the company is not material, it warned of potential “significant liabilities” in the future as a result of the precedent set by the judgment. The full impact, the Group said, remains uncertain and will depend on how the Court’s decision is applied in subsequent cases. Close Brothers has also paused new motor finance business in the UK temporarily, allowing time to update its documentation and procedures to meet the requirements set by the ruling.
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By GlobalDataAnalysts have estimated that the potential industry-wide costs for compensating claims related to commission transparency could reach between £2 billion and £10 billion, according to Bloomberg. The broader financial sector is watching the case closely as it could signal a major shift in regulatory expectations for motor finance and consumer credit practices. Close Brothers’ share price dropped significantly following the news, declining from 365p to 285p on Friday—a 22% decrease—and continuing to fall to 260p by Monday morning, representing a 66% drop year-to-date.
LSE statement from Close Brothers Group
South African bank FirstRand, which owns MotoNovo Finance through its UK subsidiary Aldermore, is also challenging the ruling. The bank has set aside a pre-tax provision of R3 billion (£130 million) for the year ending 30 June 2024, citing prudential measures to address the potential impact of further claims.
In a statement, FirstRand said: “We believe our practices were compliant with the legal and regulatory standards in place at the time.” However, the Court of Appeal found these disclosures insufficient to meet the new fiduciary duty standard.
In a statement, FirstRand argued that dealers and lenders have traditionally operated at arm’s length, focusing on sales rather than providing impartial financial advice. The bank stated that the Court’s decision to impose a fiduciary duty on brokers could create substantial risks for the motor finance and broader consumer finance sectors in the UK. “Lenders and motor dealers have always operated on an arm’s length basis,” FirstRand said, noting that the ruling introduces complexities that could affect the entire industry.
The case unfolds against the backdrop of the FCA’s ongoing investigation into historical car finance commission practices, which has intensified regulatory scrutiny. The FCA banned discretionary commission arrangements in 2021, highlighting concerns that these commissions incentivised dealers to increase borrowing costs for customers. In January, the FCA also alerted lenders to brace for additional costs as complaints regarding unfair pricing on auto loans continue to rise.
The FCA commented on Friday that it was “carefully considering” the Court of Appeal’s ruling in the Hopcraft case. Meanwhile, Barclays Plc is mounting its own appeal over similar issues, further underscoring the shifting landscape in consumer finance regulation.
Close Brothers, despite this uncertainty, underscored its strong financial position, with a Common Equity Tier 1 (CET1) capital ratio of 12.8% as of 31 July 2024. The Group noted ongoing measures to strengthen its capital standing, including the planned sale of its asset management unit, which is projected to raise the CET1 ratio by approximately 100 basis points. Close Brothers also emphasised its conservative funding strategy, with a Liquidity Coverage Ratio averaging over 1,000% for the past 12 months.
