In a significant development within the automotive finance sector, the Supreme Court is poised to decide whether consumers were adequately informed about commission payments on car loans. This ruling could affect approximately two million new and second-hand car sales conducted through finance agreements each year in the UK. These agreements typically involve customers making an initial deposit followed by monthly payments with interest. The potential for consumers being overcharged hangs in the balance, prompting major banks to prepare for possible compensation payouts.
Barclays has allocated £90 million in anticipation of compensatory claims, while Spanish bank Santander has provisioned £295 million. Lloyds Banking Group, which owns the motor finance company Black Horse, faces the largest potential financial impact. The bank has earmarked an additional £700 million for potential compensation, adding to the £450 million previously set aside, bringing their total provision to £1.2 billion. This amount is nearly triple the initial allocation and has significantly impacted Lloyds' financial performance.
The bank's annual pre-tax profits fell to £5.97 billion from £7.5 billion the previous year, influenced by this provision alongside a faltering UK economy and declining interest rates. The precautionary measures reflect Lloyds' substantial exposure, reminiscent of the costly PPI mis-selling scandal, which saw the bank disburse £21.9 billion by 2019.
"Underlying performance has been really robust and we've seen really good growth in the business," said Charlie Nunn, highlighting the company's resilience despite the challenging financial landscape.
"While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain," commented Matt Britzman, underlining the potential risks associated with the pending Supreme Court decision.
The automotive finance market's reliance on commission structures means this ruling could set a precedent affecting not only consumers but also financial institutions. If the court finds in favor of consumers, it could lead to substantial compensation claims and drive changes in how car loan agreements are structured and communicated.