British banks could be required to pay out tens of billions of pounds if the Supreme Court upholds a ruling that controversial car loans are illegal. The case is set to begin in April.
These loans encouraged car dealers to offer higher interest rates in exchange for higher commissions, without clearly informing borrowers about the full costs. Consumer group Which! estimates that millions of drivers could be eligible for compensation if the UK’s top court rules in favor of the borrowers.
The UK government has intervened in the case due to concerns over the potential economic impact. AJ Bell’s investment director, Russ Mould, warned that such a large payout could limit banks’ ability and willingness to lend, particularly as the economic outlook remains uncertain. This, he suggested, could explain the government’s interest in the case.
One of the claimants, Marcus Johnson, is at the heart of the case. He took out a loan in 2017 when purchasing a Suzuki Swift for £6,500 ($8,400) from a dealer in Cardiff, unaware that the interest he paid on the loan would fund a commission of over £1,600. In October, the Court of Appeal ruled in Johnson’s favor, ordering South African lender FirstRand Bank to refund the commission and interest, which caused concern throughout the finance sector.
The Supreme Court will hear Johnson’s case on April 1, alongside another case involving FirstRand and one against British bank Close Brothers. If the court rules in favor of the borrowers after the three-day hearing, it will set a precedent for similar cases nationwide, potentially triggering billions in compensation payments.
The Supreme Court noted that the claimants in the linked appeals were financially unsophisticated and on relatively low incomes. It rejected the government’s attempt to intervene in the case.
Billions in Potential Costs
In anticipation of the ruling, British banks have set aside significant amounts. Lloyds Bank, for example, has reserved nearly £1.2 billion. Which! estimates that the cost to banks could reach up to £16 billion, but other analysts believe the figure could be even higher. HSBC, for instance, has suggested the total could reach £44 billion.
This would put the cost of the scandal on a similar scale to the payment protection insurance (PPI) mis-selling issue, which resulted in UK banks paying out £45 billion to £50 billion in compensation.
In 2021, the Financial Conduct Authority (FCA) banned undisclosed commissions and began an investigation into the practice early last year. The FCA has said it will wait for the Supreme Court’s ruling before deciding whether to launch an automatic compensation program.
Mould added that even if the Supreme Court upholds the Court of Appeal’s decision, it could still take steps to limit the amount of compensation, which could be the best-case scenario for the banks.
