Lawyers’ phones are ringing off the hook following the landmark motor finance ruling, leading to questions in the financial sector around its exposure to fiduciary duty issues.
Earlier this month, the Supreme Court gave lenders some relief by accepting two of the three pending appeals.
The Lord Justices were asked to decide whether to overturn a controversial Court of Appeal ruling from October, which found it unlawful for banks to pay commissions to car dealers without the customer’s informed consent.
As a result, the top court held that car dealers arranging motor finance do not owe a fiduciary duty to customers.
Questions arise
However, despite the court addressing fiduciary duty in motor finance arrangements, questions are emerging from gaps left by the decision.
Felicity Ewing, partner at law firm Dentons, told City AM: “We are starting to field questions from clients on commercial relationships where they don’t quite match the scenarios considered by the Supreme Court, to help them understand whether there remains a risk of a fiduciary relationship arising.”
“We have seen a real increase in clients’ interest in the scope of their duties and the scope of duties of intermediaries that they engage,” added Tim West, partner at Ashurst.
When City AM contacted other lawyers, many agreed they are seeing a rise in inquiries on the topic.
City AM also understands that one financial sector body has instructed a senior barrister to review its own internal policy in light of the ruling.
West explained that clients are also naturally interested in understanding the risk of claims.
“Outside of motor finance, there is existing group litigation concerning secret commissions where the intermediaries involved owed fiduciary duties, and so much of the Supreme Court’s reasoning will do little to reduce the risk of those claims,” he added.
Rushed motor finance redress raises concerns
Shares in the UK’s major lenders surged after the better-than-expected result. However, the court left some questions unanswered as it deemed the relationship between Mr Johnson and FirstRand to be “unfair,” and awarded him commission of £1,650.95 plus interest.
As a result, the City regulator is consulting on an industry-wide redress scheme costing between £9bn and £18bn.
Hyder Jumabhoy, partner at White & Case, noted the growing number of queries around the logistics of the FCA’s upcoming redress. “Firms want to understand if the FCA will consult widely or focus their efforts on larger motor finance providers who were previously notified in the context of setting aside provisions,” he explained.
One lawyer told City AM: “There’s a lot to be done in a rush” after the Court’s ruling left the door ajar for consumers to lodge claims.
“The FCA wants to put this scheme through in a year or so – it just that there’s a danger there. Because if you rush to do something there’s obviously political benefit. But you may all get it wrong,” they added.
Rachel Reeves has waded into the motor finance saga with an attempt to intervene in the Supreme Court case earlier this year. The Chancellor was also reported to be exploring routes to overturn the ruling should an adverse judgment have been handed to the banks.
Reeves, who has turned to banks for crisis tariff talks and growth summits in recent months, was one of many dreading a redress bill which analysts thought could top £30bn.
The City watchdog has said it aims to finalise the scheme for launch in 2026, with consumers starting to receive compensation next year. Consumers are expected to receive up to £950 in compensation.
Beyond the final bill, several key aspects of the redress scheme still need to be confirmed – including whether participation will be opt-in or opt-out, and how precisely the “degree of harm suffered by the consumer” (used to calculate redress) will be defined.
But even the details outlined have sparked concern across the City. The FCA said it will cover agreements dating back to 2007, which trade associations have branded “impractical”.