New Court of Appeal decision could expose multiple lenders to billions in losses
UK lenders are feeling the shockwaves of a major Court of Appeal ruling, which has exposed long-standing flaws in the way they have been paying brokers’ commissions. In reaction to the decision, investors fled from banks that they thought might be exposed and Lloyds Banking Group Plc slumped 7.4% - the biggest drop for over two and a half years. Lloyds may be liable for up to £2.5 billion wrote Jonathan Pierce, an analyst at Jefferies International: “It increases the risk of our worst-case scenario.”
Just days earlier, the bank had seen its share prices buoyed by better than expected results but this judgment says banks and brokers may have misled customers with hidden commissions on car loans - potentially opening the door to billions of pounds in compensation claims against multiple lenders.
“The consumers were very poorly served by the brokers and the lenders alike,” the judges wrote.
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.
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.
According to the court, the borrowers—a mix of students, workers, and first-time car buyers—placed their trust in the brokers to act in their best interests. Instead, the brokers pushed financing deals that benefited them through undisclosed commissions, sometimes amounting to a significant portion of the credit cost. In one case, a customer was charged an inflated loan rate, unaware that the broker received a payment covering nearly 70% of the total interest.
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The court also highlighted that the lenders’ small-print references to possible commissions were insufficient to alert customers to these hidden fees. It ruled that both FirstRand and Close Brothers breached their duties to consumers by not ensuring transparency in the loan agreements, setting a precedent for holding financial institutions accountable in such cases.
“This is about trust and fairness,” the judges wrote. “The consumers were very poorly served by the brokers and the lenders alike.”
Close Brothers, in response to the ruling, announced that it would temporarily stop issuing new motor finance deals in the UK. Meanwhile, FirstRand argued that its disclosures met legal standards, though the court found otherwise.
The judgment now has banks across the country on high alert. Financial experts warn that lenders, including Lloyds, may face claims amounting to billions. Citigroup analysts predict the potential compensation could double their initial estimate of £9 billion if similar claims follow.
The Financial Conduct Authority (FCA) is also expected to conduct a broader investigation into motor financing practices, ensuring the industry follows clearer rules in the future.
For borrowers and lenders, this case reveals the high price of hidden costs—and the importance of trust in every financial transaction.
Who are the defendants in the case?
Close Brothers Group Plc is a UK-based merchant banking group that provides financial services to businesses and individuals. Founded in 1878, the company operates primarily in three key areas: banking, asset management, and securities trading. Known for its niche lending activities, Close Brothers focuses on offering tailored financial products and services, particularly in areas where traditional banks might not be as active.
Key areas of operation:
- Banking
- Motor finance: Through Close Brothers Motor Finance, the company provides vehicle loans, partnering with dealerships to offer financing solutions for both new and used cars.
- Property finance: Provides lending to property developers, bridging loans, and other real estate-related financing.
- Asset finance: Offers businesses leasing and hire-purchase options to finance equipment and other assets.
- Savings: Close Brothers also offers savings accounts for retail customers, including fixed-term deposits and ISAs.
- Asset management
- Close Brothers Asset Management provides wealth management services, such as investment planning, pensions, and advisory services to individuals and corporate clients.
- Securities
- The firm operates in securities trading and investment through Winterflood Securities, which specialises in market-making and electronic trading.
Reputation
Close Brothers has built a reputation for specialised lending and personalised financial solutions. However, this latest court decision has drawn scrutiny, underscoring the need for transparency in its operations, particularly in consumer-facing areas like motor finance.
MotoNovo Finance is a UK-based financial services company specialising in vehicle finance. It operates as a subsidiary of FirstRand Bank Ltd, a South African banking group, and focuses on providing loans for the purchase of new and used cars, motorcycles, and light commercial vehicles. MotoNovo primarily partners with dealerships across the UK, offering financing solutions directly to consumers through hire-purchase (HP) and personal contract purchase (PCP) agreements.
Key services provided by MotoNovo:
- Car finance:
MotoNovo provides a range of financing products, including:- Hire Purchase (HP): Where customers pay off the vehicle in instalments and own it at the end of the term.
- Personal Contract Purchase (PCP): Allows customers to pay lower monthly instalments, with the option to purchase the car at the end of the term or return it.
- Personal Loans: In some cases, MotoNovo offers unsecured loans alongside vehicle financing to cover costs beyond the hire-purchase agreements.
- Dealer partnerships:
MotoNovo works closely with a large network of UK car dealerships. Dealers promote MotoNovo’s finance packages, often offering point-of-sale finance options to customers looking to buy vehicles. In return, the dealers earn commissions from MotoNovo for each successful financing agreement.
