Legal ruling, job cuts, mortgage market share all disrupt giant lender
Just days ago we broke the news of Lloyds facing a ‘worst case’ scenario over previous lending, and since then banks have been scrambling to meet regulators to clear up just what effects offering commissions to brokers could have following a crucial court case. And in the rolling fall out, another giant lender is bleeding red into the stock market screens.
In a move that has shocked the market, Santander UK has postponed the release of its third-quarter financial results to assess the impact of the significant Court of Appeal ruling regarding commission payments on car loans. The judgment has raised concerns across the industry, as it mandates that lenders fully disclose commissions to customers when dealers receive payments based on loan terms.
The case centred on appeals brought by several customers against two financial institutions—FirstRand Ltd, operating under the MotoNovo Finance brand, and specialist property and motor lender Close Brothers Group Plc. At the heart of the matter was whether brokers adequately disclosed the commissions they received from lenders for setting up finance agreements.
Read more: The case that’s shaking up lenders
The customers involved were offered car finance through brokers, who acted both as sellers of vehicles and as intermediaries arranging hire-purchase or loan agreements. However, these borrowers were unaware that the brokers were earning commissions from lenders based on the loans’ terms, creating a conflict of interest. In some instances, these commissions were calculated using a “difference in charge” (DIC) model, which incentivized brokers to secure higher interest rates to maximize their own earnings.
Santander says it is taking additional time to understand the financial implications of the ruling, which could lead to massive compensation claims.
Read more: Santander mortgage market share gutted as battle for customers heats up
The delay comes at a turbulent time for the bank, which is also in the process of cutting 1,425 jobs across its UK operations. Chief Executive Hector Grisi confirmed that these layoffs, driven by increased automation, are part of broader cost-reduction efforts. These staff reductions align with recent operational challenges for the bank, including a decline in its mortgage market share, which fell from 11.4% to 6.7% in the second quarter. The restructuring efforts are aimed at stabilizing profitability and improving competitiveness in a tightening market.
Read more: Santander starts slashing jobs
While Santander UK grapples with these challenges, its parent company, Banco Santander, reported strong financial performance, posting an 11% increase in profits for the third quarter. However, the legal ruling and potential liabilities have unsettled markets, with concerns over the future impact of compensation payouts.
This judgment, which has prompted other banks such as Lloyds and Barclays to review their practices, could set a new precedent for lenders. Santander has expressed disagreement with the court’s conclusions, emphasizing that the judgment imposes more stringent standards than previously understood.
Hidden commissions for brokers: A case that redefines transparency in lending
The case involving two financial institutions—FirstRand Ltd, operating under the MotoNovo Finance brand, and Close Brothers Group Plc—has brought renewed focus to transparency in the motor finance sector. At the core of the dispute is whether brokers adequately disclosed the commissions they received from lenders when arranging finance agreements for their clients.
The case involved several customers who secured car loans through brokers acting both as vehicle sellers and intermediaries for hire-purchase or loan agreements. However, these customers said they were unaware that the brokers were receiving commissions from lenders, a practice that introduced a conflict of interest. In some cases, brokers earned higher commissions by negotiating higher interest rates for the loans, a structure known as the “difference in charge” (DIC) model. This system incentivized brokers to prioritize their own earnings over the borrowers' financial well-being.
The court found that the customers—ranging from students to first-time car buyers—placed their trust in the brokers, expecting them to provide honest and fair financing options. Instead, these brokers facilitated deals designed to maximize their own commissions, sometimes inflating loan costs significantly. One striking example involved a broker receiving a commission equivalent to 70% of the total interest paid on a loan, unbeknownst to the borrower.
While some lenders included references to commissions in the fine print, the court determined that these disclosures were insufficient to make customers aware of the hidden costs they were being subjected to. As a result, both FirstRand and Close Brothers were deemed to have violated their duty to ensure transparency and fairness in the agreements, establishing a significant precedent for consumer protection.
Lender Responses and Broader Implications
Following the ruling, Close Brothers announced a temporary suspension of new motor finance agreements in the UK, signaling an immediate response to the legal outcome. In contrast, FirstRand defended its practices, arguing that its disclosures complied with legal requirements, though the court ruled otherwise.
The judgment has sent ripples throughout the financial industry, with analysts warning that other institutions, such as Lloyds Bank, could face similar challenges. Experts now estimate that compensation claims related to undisclosed commissions might exceed initial forecasts of £9 billion, as more borrowers may come forward with grievances.
The Financial Conduct Authority (FCA) is expected to initiate a broader investigation into the motor finance industry to ensure that future lending practices align with clearer regulatory standards. This case highlights the importance of full transparency in financial transactions and underscores the risks consumers face when hidden costs are involved.
Understanding the Defendants: Close Brothers and MotoNovo Finance
Close Brothers Group Plc, a UK-based financial institution founded in 1878, operates in several specialized financial areas. Its key operations include motor finance, property finance, and asset finance. Close Brothers Motor Finance, a subsidiary of the group, offers vehicle loans in partnership with dealerships, allowing customers to finance both new and used vehicles. The group’s asset management division provides investment services and financial planning, while its securities arm, Winterflood Securities, focuses on market-making and electronic trading.
MotoNovo Finance, a subsidiary of South African banking giant FirstRand, plays a significant role in the UK vehicle finance market. It offers a range of financial products, including hire purchase (HP) and personal contract purchase (PCP) agreements, often through dealership partnerships. While HP allows customers to own a vehicle after completing their instalments, PCP offers lower monthly payments with the option to purchase or return the car at the end of the term.
Through these dealership collaborations, MotoNovo provides point-of-sale financing, where dealers earn commissions for each successful loan arranged. However, the recent case has drawn attention to the need for transparency in these commission-based incentives, sparking criticism and regulatory scrutiny.
A Wake-Up Call for the Finance Industry
This case serves as a stark reminder of the potential pitfalls when transparency is compromised in financial dealings. For borrowers, it emphasizes the importance of understanding the full cost of finance agreements, including any hidden fees or broker incentives. For lenders and brokers, it signals that regulatory bodies and courts are increasingly unwilling to tolerate practices that prioritize profits over fairness.
With the Financial Conduct Authority preparing to review the industry more closely, lenders may have to ensure they operate with greater transparency to avoid similar legal challenges in the future.
