Concerns spread as lenders amend their broker relationships
The recent Court of Appeal ruling over undisclosed commissions in car loans has sent shockwaves through the UK lending sector, pushing Metro Bank to pause its asset finance lending temporarily. The decision reflects the increasing pressure on banks to evaluate their practices and legal obligations in light of the judgment, which has cast a spotlight on the transparency of commission arrangements between lenders and brokers.
Last Friday, the Court of Appeal issued a landmark decision that raised the standards for disclosing broker commissions, holding lenders accountable if brokers fail to transparently communicate these commissions to consumers. Several banks, including Metro, have since halted specific finance services to review their compliance frameworks, particularly in asset and motor finance. This ruling affects more than just the car loans industry - it signals potential widespread reform in lending practices across multiple sectors.
Read more: New Court of Appeal decision could expose multiple lenders to billions in losses
Metro Bank explained to The Times that the pause on asset finance was a precautionary measure, allowing the bank to “review our current systems, process, and legal documentation.” They added that lending would resume shortly, with a new commission consent form now required to ensure borrowers are informed of any broker commissions involved in their loans.
The ruling came after consumers brought forward cases against financial institutions, notably FirstRand Ltd (operating as MotoNovo Finance) and Close Brothers Group Plc. Customers argued that they were unaware of brokers’ commissions and felt misled. In these cases, brokers who arranged car finance deals were not fully transparent about earning commissions from lenders, sometimes using a model that incentivised higher loan rates to boost their commission. According to the court, this conflict of interest breached the brokers' duty to act in the borrowers' best interest, with one case revealing a broker commission amounting to nearly 70% of the total interest paid on a loan.
This ruling has set a high bar for broker disclosure practices, with judges emphasising the importance of trust and transparency in lending. The court stated that “the consumers were very poorly served by the brokers and the lenders alike,” highlighting a significant ethical failing in the industry.
As a result, financial institutions have scrambled to reassess their practices. Close Brothers suspended its motor finance operations in response, while FirstRand defended its practices as legally compliant, despite the court’s findings. Metro Bank’s move to pause its asset finance lending shows the judgment’s ripple effects beyond car finance and hints at broader consequences across various types of lending – and there is concern in some quarters that this could even spread to mortgage sales.
The decision also had immediate repercussions in the stock market, with investors pulling back from banks potentially exposed to hefty compensation claims. Lloyds Banking Group, for instance, saw its shares drop by 7.4%, amid analyst predictions that the bank might face liabilities of up to £2.5 billion. Jonathan Pierce, an analyst at Jefferies International, remarked that the ruling “increases the risk of our worst-case scenario,” indicating the gravity of the financial impact.
This judgment has also prompted the Financial Conduct Authority (FCA) to examine broader motor finance practices, possibly resulting in stricter regulations for brokers and lenders alike. Citigroup analysts now estimate that compensation claims could exceed £9 billion if more cases arise.
