Close Brothers Group and FirstRand have announced plans to appeal to the UK Supreme Court after the Court of Appeal ruled against them in a landmark decision on Motor Finance Commission disclosures.
The ruling, handed down on Friday, Oct. 25, upheld claims from three consumers alleging fraudulent auto financing and overturned an earlier ruling in a lower court.
The case, known as the “Hopcraft” case, centers on the requirement that brokers obtain fully informed consent from their customers before receiving commissions from lenders.
The Court of Appeal held that this did not occur in any of the three related cases. This decision established a new legal standard for the duties brokers owe to their customers, establishing fiduciary duties that include duties of loyalty and disinterest. The duty requires brokers to be more transparent and seek customer consent on fees, which goes beyond existing rules from the Financial Conduct Authority (FCA).
Court of Appeal Judgment
Close Brothers said the immediate financial impact of the judgment on the company was not material, but that it could incur “significant liability” in the future as a result of the precedent set by the judgment. I warned you. The group said the full impact remains unclear and depends on how the court’s ruling is applied in subsequent cases. Close Brothers has also suspended new car finance operations in the UK to allow time to update its documentation and procedures to meet the requirements set out in the judgment.
According to Bloomberg, analysts estimate that the potential industry-wide cost of claims related to fee transparency could reach between £2bn and £10bn. The entire financial industry is closely monitoring this case, as it could lead to major changes in regulatory expectations for auto and consumer finance. Close Brothers’ share price fell sharply on the news, falling 22% from 365p to 285p on Friday and continuing to fall to 260p by Monday morning, a 66% fall since the start of the year. .
Close Brothers Group LSE Statement
South African bank FirstRand, which owns Motonovo Finance through its British subsidiary Aldermore, is also appealing the ruling. The bank has made a R3bn (£130m) pre-tax provision for the year ending 30 June 2024 due to prudent measures to deal with the potential impact of further claims. .
FirstRand said in a statement that it “believes that our operations complied with the legal and regulatory standards then in effect,” but the appeals court ruled that these disclosures did not meet the new fiduciary duty standards. was judged to be insufficient.
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FirstRand argued in a statement that dealers and lenders traditionally operate at arm’s length and are focused on selling rather than providing impartial financial advice. The bank said the court’s decision to impose fiduciary duties on brokers could pose significant risks to the UK’s motor finance and wider consumer finance sectors. “Financiers and car dealers have always operated at arm’s length,” Firstland said, noting that the ruling introduces complications that could affect the entire industry.
FirstRand JSE statements
The case unfolds against the backdrop of the FCA’s ongoing investigation into the practices of the Historic Motor Finance Board, which has come under increased regulatory scrutiny. The FCA banned discretionary fee arrangements in 2021, highlighting concerns that these fees encourage dealers to increase borrowing costs for customers. The FCA also warned lenders in January to prepare for additional costs as complaints about unfair pricing on car loans continued to rise.
The FCA commented on Friday that it is “carefully considering” the Court of Appeal’s decision in Hopcraft. Meanwhile, Barclays has stepped up its own complaints on similar issues, further highlighting the changing landscape of consumer finance regulation.
Despite this uncertainty, Close Brothers highlighted its strong financial position, with a Common Equity Tier 1 (CET1) capital ratio of 12.8% as of July 31, 2024. The Group noted its continued measures to strengthen its capital position, including plans to sell its shareholdings. This is expected to increase the CET1 ratio by approximately 100 basis points. Close Brothers also emphasizes a conservative funding strategy, with liquidity coverage ratios averaging over 1,000% over the past 12 months.
‘Close Brothers and FirstRand to appeal UK court ruling on motor financial disclosure obligations’ was originally created and published by Motor Finance Online, a brand owned by GlobalData.
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