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The crisis affecting the automobile financing market could spread to other sectors of the insurance sector, experts warned.
The Court of Appeal ruled last month that commissions paid between banks and brokers for car transactions may be illegal because they were not clearly disclosed to the customer.
The decision plunged the auto finance industry into confusion.
Shares in major lenders, including Lloyds, plummeted as there were fears they could face a bill similar to the £50bn in costs and compensation they paid for the mis-selling of payment protection insurance (PPI), one of the biggest scandals in history. the banking industry.
Ruling: The Court of Appeal ruled last month that commissions paid between banks and brokers on auto transactions may be illegal because they were not clearly disclosed to the customer.
The latest court case involves so-called “discretionary commission arrangements” used by the auto finance industry before its ban in 2021.
Close Brothers, one of Britain’s oldest commercial banks, has stopped making car loans while it considers an appeal to the Supreme Court.
But analysts at investment bank RBC warn that if the Court of Appeal’s verdict is upheld, “the car finance litigation could spread to other products such as premium finance”, where banks also pay commissions to intermediaries, but which cannot be revealed either.
Warning about the impact of the court ruling, the RBC report said: “One possible interpretation is that the decision is broad enough to cover any broker commission on any financial arrangement in which the borrower did not give informed consent for it to be will pay the commission.”
Close Brothers was already on the hook for up to £390m in payments to customers if it lost the court case over the car loan, RBC estimated.
But the company has planned an additional £250m in compensation for the bank in the event of a “bad outcome”.
Car loans account for around a fifth of loans at Close Brothers, or almost £2bn. But premium funding accounts for another tenth of its loans, or £1bn.
James Daley, of consumer campaign group Fairer Finance, said the court ruling could have “massive consequences for the entire credit sector and possibly beyond”.
The banks were “pretty angry,” he added, and were “pushing hard” for the government to intervene.
Premium financing involves customers borrowing money at high interest rates to spread the cost of their car or home insurance over monthly installments, rather than paying a single lump sum.
It is estimated that more than 20 million customers pay for their car and home insurance this way and more than three-quarters of adults in financial difficulty have used the product, according to the city’s Financial Conduct Authority.
While much smaller than the £39bn car finance market, premium finance loans will exceed £5bn in 2022, generating up to £1.2bn of revenue for providers, according to the FCA.
Auto insurance policyholders saw their premiums rise by an average of 25 percent last year, driven by inflation and rising insurance claims.
The regulator is reviewing both premium and motor finance amid concerns that customers are not getting fair or competitive deals.
Close Brothers has been contacted for comment.
The company recently sold its asset management division for £200 million and eliminated dividend payments to shareholders in a bid to preserve capital.
The bank said the court ruling could result in “significant liabilities” but described its financial position as “solid.”
Close Brothers shares fell 2.5 per cent to 220.2p yesterday, a 30-year low.
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