The motor finance industry is currently facing a serious crisis after a significant court ruling shook up the sector. Recently, a London court made a decision that could change how commissions on car loans are handled, and it’s causing a wave of concern across the finance industry. The ruling has some industry experts worried about a situation as damaging as the PPI scandal, which cost banks billions.

What the Court Ruled

The case involved car loan commissions and whether or not these payments to brokers could happen without fully informing customers. The Court of Appeal ruled that it’s not lawful for brokers to get commissions from lenders unless the customer is aware and gives their full consent. This decision could mean huge changes for the motor finance industry, as it forces lenders to make their commission processes more transparent. The ruling might also pave the way for a compensation scheme led by the Financial Conduct Authority (FCA), which could make lenders pay back billions in claims.

Big Changes for Major Lenders

One of the biggest changes after the court’s decision was at Lloyds Banking Group. The UK’s largest auto lender, Black Horse, is part of Lloyds, and it has now stopped paying commissions on new car loans. On Tuesday, Lloyds’ Chief Financial Officer William Chalmers talked to investors about the company’s response, but he didn’t confirm if they’d need to add to the £450 million already set aside for potential compensation costs. Since the court decision, Lloyds’ share price has dropped by 14%, and some analysts say the bank could lose up to £3.9 billion in the worst-case scenario.

Close Brothers, another large financial firm in the UK, is also heavily impacted. The company, which was directly involved in the court case, has paused new car loans altogether. Earlier this year, Close Brothers made preparations by securing £400 million and selling its wealth management arm to brace for the expected losses. However, the recent ruling has hit them even harder, with the company’s share price falling by 37%, marking a three-decade low. Analysts predict Close Brothers may face losses as high as £387 million, which is more than the company’s total market value.

Other big names in the industry, such as Santander UK, are also making adjustments. Santander has delayed its third-quarter financial report to fully assess the implications of the court ruling, and analysts think it may take a financial hit of up to £1.8 billion.

Smaller Lenders Hit Hard

It’s not just the big banks feeling the heat. Several smaller lenders, including Zopa, Secure Trust Bank, MotoNovo, Mann Island, V12, and Northridge, have temporarily paused their car loan businesses. Many of these lenders had been confident they wouldn’t be heavily impacted by the FCA’s investigation into discretionary commission arrangements (DCAs), which looked at how commissions were distributed in motor finance between 2007 and 2021.

This sudden pause in lending has led some experts to wonder if smaller banks may leave the auto lending business entirely. Benjamin Toms, an analyst at RBC, suggests that while banks will adapt their systems to follow the new rules, some might decide the auto finance sector is no longer worth the risk. The ruling may pressure firms to rethink their lending practices, and some lenders could eventually shift their focus elsewhere.

Growing Concerns Among Consumers

With the court ruling fresh in everyone’s minds, consumer complaints about car finance are on the rise. The FCA’s probe into DCAs has caused consumers to wonder if they might be owed compensation, leading to a surge in complaints filed with the Financial Ombudsman Service. Within just four months of the FCA’s probe announcement, the Ombudsman received around 20,000 complaints about car finance. Many of these complaints come from people looking to recover money they feel was unfairly charged due to hidden commissions.

Some lenders, like Secure Trust, had hoped their involvement in DCAs was minimal enough to avoid major fallout. But the court’s recent decision is changing everything, and claims management firms are helping consumers file even more complaints as they seek compensation.

Government Steps In

With so much at stake, the government is now paying close attention. Treasury ministers held urgent meetings with FCA officials and representatives from the Finance and Leasing Association (FLA), a group representing auto lenders. The FLA has asked the FCA to extend its pause on the deadline for handling DCA complaints. This pause was initially set to expire in December 2025, but the FLA is requesting a longer timeline to address the growing number of cases.

The Treasury is collaborating with the FCA and industry experts to understand the full impact of the court’s decision. A Treasury spokesperson stated that they are working closely with both regulators and the motor finance industry to respond to the ruling. The decision also sets a broader legal precedent, meaning it might apply to other areas of consumer finance as well, not just car loans.

Lingering Questions

There are still a lot of questions about how far this ruling will reach. Analysts like Benjamin Toms at RBC are asking critical questions: Will the ruling only impact motor finance, or could it extend to other types of consumer finance? Which years are covered by the decision? And most importantly, will banks be forced to refund all commissions paid without customer consent?

The FCA was initially scheduled to release an update on the DCA review in September. However, the timeline was delayed to May 2025. With this court ruling now in play, experts think the FCA might need even more time to come to a conclusion. Close Brothers and the South African bank First Rand, both of which were part of the original case, plan to appeal the ruling at the Supreme Court, hoping to get a more favorable decision. But even with the Supreme Court moving quickly on the appeal due to its financial importance, a final ruling may not arrive in time for the FCA to make decisions by May.

What’s Next?

As it stands, the motor finance industry is preparing for significant changes. Many lenders may need to rethink their commission structures and the transparency of their practices to comply with new legal standards. Meanwhile, the government, regulators, and lenders alike are working to address the growing fallout and decide what needs to change in motor finance.