Court Sided With Aggrieved Car Loan Customers

A cloud of anxiety was hanging over the British Motor Museum. Attenders of the Financing and Leasing Association’s annual motor finance convention in Warwickshire last month had spent weeks trying to get to grips with a shock court of appeal decision that sided with two aggrieved car loan customers.

Secret Commission - In October (2024), that judges ruled paying commission to the car dealers who had arranged the loans, without disclosing the sum and terms of that commission to borrowers, was unlawful. But what judges deemed to be “secret” commission arrangements had actually been standard practice across the industry, and within City rules, for years.

Lenders started to panic. The ruling had opened the door to a fresh flood of claims – not just from borrowers, but a voracious claims management industry that had been waiting for a payment protection insurance (PPI)-style consumer scandal for years. And it was not just car loans that could be affected by the court ruling: finance on everything from sofas to new kitchens could be in scope.

Possible Misconduct Bill - £25bn,With the rating agency Moody’s forecasting a compensation bill of up to £30bn and the Bank of England predicting a misconduct bill of up to £25bn, claims companies and specialist law firms – including Bott and Co, Courmacs Legal, and The Claims Guys – could be in line for a massive payday. And investors, including UK and US private equity firms, are hoping to pile in.

The bulk of the FLA convention was dedicated to the ruling and its potential fallout. “It wasn’t the elephant in the room – it was topic number one on the agenda."

Claims management companies (CMCs) found their footing in the UK in the early 2000s, filing compensation claims on behalf of consumers, often on a “no-win no fee” basis. The catch for consumers? Having to shell out a 40%-plus cut of any payout.

With a penchant for car accident and work injury claims, the reputation of CMCs as ambulance-chasers grew. But the burgeoning industry truly hit its stride in the wake of a judicial review in 2011 that set mass payouts over the PPI scandal in motion.

CMCs filed reams of PPI complaints on behalf of customers between 2011 and 2019, and made £3.8bn to £5bn in the process. It prompted fiery criticism from high street banks, which alleged that CMCs had also been in the business of filing spurious and low-quality claims, and taking advantage of consumers who could easily have filed complaints on their own.

The former Barclays chair John McFarlane said in September 2018 that the percentage of dishonest claims had been “enormous”. He accused the government of being “complicit” in the decline of UK banks by allowing a compensation culture to develop in Britain. The PPI scandal, he said, had turned “portions of Britain into fraudsters”.

While his comments against everyday Britons were condemned by the likes of the consumer champion Martin Lewis, McFarlane’s concerns about CMCs were shared by regulators.

20% Capped Commission - Earlier that year, the City watchdog started to clamp down, setting a 20% cap on commissions for PPI claims months before taking over regulation of the sector in spring 2019. The Financial Conduct Authority (FCA) set higher standards for CMCs and, by 2022, capped commissions for non-PPI claims at almost 30%.

The FCA fee cap put further strain on CMCs’ profits, which were dwindling as the PPI gravy train dried up. Some firms collapsed, while others re-emerged as claims law firms (CLFs), meaning they fell outside the FCA’s remit.

Mis-selling - Claims law firms are supervised by the Solicitors Regulation Authority (SRA), which, for a few years, gave firms scope to charge higher fees than their CMC counterparts. But as the motor finance commission scandal started to gain pace last year, the SRA’s lighter-touch approach came under scrutiny, prompting the authority to introduce an FCA-style cap on financial services mis-selling claims in July this year.

A caveat, however, means any legal firms pursuing claims through the courts, including over motor loans, can still charge fees of up to 50% on any winnings. But claims law firms say they can secure substantially higher payouts for consumers than if they file complaints on their own or through a CMC.

Regardless, the chance to again file claims en masse, PPI-style, mean the claims companies are back to playing a volume game. And that is already prompting further interest from onshore and overseas investors, including venture capital and private equity firms.

The claims law firm Courmacs, which launched in 2021 and is backed by the UK private equity funder Eram Capital, said it had been fielding more investor queries in recent months, as its book of motor claims surged to 1.4 million.

FLA Scrambling  – which represents car lenders ranging from big banks such as Lloyds and Barclays to the finance arms of carmakers including Ford and Volkswagen – has been scrambling for a solution that could help ease the pressure on its members. It raised concerns over CMCs and CLF claims during emergency calls with the Treasury and regulators after the court of appeal ruling, and eventually secured some temporary relief.

The FCA is now proposing to scrap an eight-week deadline for lenders to respond to customer complaints, and giving them until at least May – and potentially December 2025 – to issue final decisions.

But while a deadline for responses has been kicked down the road, lenders are still legally obliged to acknowledge each complaint in a way that can be easily passed on to consumers. And court claims, which are outside the FCA’s powers, are still flowing into motor lenders including Lloyds, Santander UK, and the court of appeal defendants Close Brothers and the MotoNovo owner FirstRand.

Lloyds - which is most exposed among UK banks to the motor finance scandal due to its £15bn Black Horse car loan division, has been fighting fire with fire, sending about 200,000 individual paper letters in response to legal claims filed by Courmacs, prompting criticism from the law firm.

Charlie Nunn, the boss of Lloyds, recently said that the legal ruling had left consumer finance companies with an “investability problem”, and that the judgment was “at odds with the last 30 years of regulation”. Skirmishes are likely to continue across the motor lending industry until the court of appeal case, likely to take place next year, is heard at the supreme court.