Vehicle financiers warn that potentially astronomical claims resulting from the UK probe could have far-reaching consequences for the industry and cause many businesses to shut their doors. Picture: AdobeStock
A UK consumer rights law firm that specialises in car finance mis-selling claims alleges that South African lender FirstRand “funnelled” more than 43% of the interest charged on a single car finance agreement toward undisclosed commissions.
Sentinel Legal is one of the firms representing claimants in a probe into the commission arrangements and sales by lenders in the UK motor finance industry.
The UK’s Financial Conduct Authority (FCA) is investigating these commissions paid over 14 years.
Two South African banks – FirstRand and Investec – raised provisions for possible compensation and costs related to the probe. FirstRand set aside R3.3 billion and Investec R648 million.
According to Sentinel, a Supreme Court ruling in favour of affected consumers could unlock billions in compensation, forcing major changes in the car finance sector.
“With an estimated 31.7 million agreements affected, millions of consumers could step forward with claims,” it says in a statement.
The possibility of such a ruling has sparked concerns that the motor finance industry could be seriously destabilised.
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In October last year, the UK Court of Appeal found against FirstRand and in favour of two claimants, Messrs Wrench and Johnson, who appealed an earlier lower court judgment ruling that FirstRand’s commission arrangements had been fair.
The appeal court ruled that FirstRand’s disclosure of commission payments was inadequate to ensure the customer was aware that a commission was paid.
FirstRand at the time noted that it was “concerned by the judgment” and that it would seek permission to appeal the judgment.
Sentinel alleges that its investigation has uncovered “startling evidence of widespread mis-selling” and commission-hiding practices from car finance companies.
“In one case involving FirstRand Bank, documents revealed that a staggering 43.66% of the total interest charged on a car finance agreement was funnelled into undisclosed commissions. Despite this damning evidence of exploitation, the bank continues to deny any wrongdoing.”
Moneyweb approached FirstRand for comment, but the lender declined to respond in light of its preparation for its legal case.
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Meanwhile, both the UK Treasury and Labour Chancellor Rachel Reeves have intervened in the case in what is perceived as an attempt to mitigate the financial risks for lenders and to ensure market stability.
Lenders have warned that the potentially astronomical claims could have far-reaching consequences for the industry and cause many businesses to shut their doors.
FirstRand, in its reaction to the Supreme Court ruling last year, also flagged the “far-reaching and materially negative” implications for the motor finance industry and the broader consumer finance sectors in the UK.
Sentinel however calls the interventions a “desperate attempt” to protect the industry from accountability.
“Faced with the prospect of billions in liabilities, car finance lenders have mounted an aggressive defence, warning that a ruling against them could destabilise the industry … [but] the real harm lies in the billions already lost by consumers due to these undisclosed commissions.”
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The judgment in the case against FirstRand relates to motor finance agreements that form part of the MotoNovo Finance book in the London branch. FirstRand acquired MotoNovo in 2006. In March 2018, it was integrated with Aldermore Bank after FirstRand’s acquisition of Aldermore.
Lloyds Banking Group and Close Brothers Group – both significant lenders in the UK – have set aside £450 million (R10.2 billion) and £10 million (R228 million) respectively in the event of possible compensation and other costs.
This article was republished from Moneyweb. Read the original here.
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