Motor finance: Close Brothers stock falls as banks face judgment day in Supreme Court case
Car dealers do not owe a fiduciary duty to customers when arranging finance, the Supreme Court heard Tuesday morning in opening remarks of the landmark motor finance case.
Mark Howard KC argued that exercising judgement in pre-selecting finance options does not impose a duty of loyalty. “The key point in the Hopcraft case, there is no finding of fact of an undertaking to act on or on behalf of this or any advice on findings, or any suggestion the dealer said the best deal would be obtained,” he stated.
The barrister, acting for Fristand Bank, emphasised that the legal test applied in this case could lead to absurd conclusions.
Howard KC was kicking off the hearing addressing ground one of the appeal, fiduciary duty. A fiduciary duty is a legal obligation requiring an individual or entity to act in the best interests of another party, prioritising their interests.
Today, lenders are aiming to overturn a ruling that could cost the industry billions of pounds in compensation over motor finance.
The Lord Justices are listening to Laurence Rabinowitz KC for Close Brothers and Howard KC for Firstrand Bank today on their arguments for their application for appeal.
This comes as shares in FTSE 250 lender Close Brothers were volatile during early trading on Tuesday after this case kicked off.
Lawyers for the consumer groups and the interveners, the Financial Conduct Authority (FCA), and the National Franchise Dealers Association will present their arguments on Wednesday and Thursday.
However, according to the FCA’s written submissions, as seen by CityAM, the City watchdog believes the Court of Appeal’s approach was ‘too far’.
“The sweeping approach of the Court of Appeal in (effectively) treating motor dealer brokers as owing fiduciary duties to consumers in the generality of cases goes too far,” they stated.
However, the City watchdog goes on to “respectfully” suggest the Supreme Court that it “should exercise a degree of caution before accepting the appellants’ (lenders) invitation to jettison the tort of bribery or the ‘disinterested’ duty, as that may leave a lacuna in the law and lead to the distortion of established principles.”
The FCA acts as an intervener, which HM Treasury tried to do after Chancellor Rachel Reeves eyed a seat in front of the Justices, however, the court rejected their application in February.
The case continues until Thursday with a closely watched ruling to follow in a few months time.
Background
Last October the Court of Appeal handed down a judgment that turned the lending sector on its head in a case targeting Close Brothers and South African Firstrand Bank.
The court ruled that a broker could not lawfully receive a commission from the lender without obtaining the customer’s fully informed consent to the payment.
As a result, in order for consent, the consumer would need to be told all material facts that might affect their decision, including the amount of the commission and how it was to be calculated.
The Court of Appeal ruled that did not happen in those cases.
This came after the FCA revealed early last year it would review the historical motor finance commission arrangements.
The motor finance industry was already bracing for potential compensation fees tied to this review into discretionary commission arrangements, but the court case put a spanner into the works.
Over the last six months, Close Brothers’ share price has plunged nearly 24 per cent. While Lloyds Bank set aside an additional £700m in provisions, bringing the total to £1.2bn.
Meanwhile, Santander set aside £295m and Close Brothers has reserved £165m.
If the Supreme Court sides with the consumers and rejects the lenders appeal, it is estimated that billions of pounds will on the line – Moody’s quoted a potential total compensation of £30bn.