Lenders are facing a “PPI 2.0” in claims due to the car finance ruling

After a judge ruled that auto finance companies had hidden commission payments from their customers, borrowers could bring claims against banks totaling billions of pounds for mis-sold mortgages.

Lloyds Bank announced on Monday that they were “assessing the possible impact” of the Court of Appeal’s ruling in favor of borrowers who claimed that commission payments had not been fully disclosed as part of the terms of auto loans.

Lloyds stated that the ruling set “a higher standard for disclosure and consent of the existence, nature and quantum of any commissions paid than was understood or applied throughout the motor finance sector prior to the case”.

At Monday’s closing, shares of Lloyds Banking Group (listed on the FTSE 100) were down by 1 1/2p or 2.7 percent to 56 1/4p.

Lenders may stop providing car finance because they fear being forced to compensate borrowers.

Close Brothers announced on Friday it was halting new business.

Lloyds has set aside 450 million pounds sterling in February to compensate borrowers for car loans that were granted with inflated terms or fines.

The Court of Appeal decided last Friday in favor of three borrowers, that it was illegal for lenders to pay car dealers’ commissions without their knowledge. This ruling could be a precedent that auto loan providers will have to include more information in loan contracts.

This could also result in a rise in claims made against motor finance companies and other lenders that provide credit with commission payments. Analysts have dubbed this a “PPI 2.0” in reference to the large sums that lenders paid out for mis-selling of payment protection insurance.

Close Brothers shares, one of the largest motor finance lenders in the country, fell over 27% on Friday after the three cases that were merged this year won. Close Brothers shares fell 7.9% to 254 3/4p per share on Monday.

Close Brothers, as well as FirstRand, a defendant in the case will appeal the decision to the UK Supreme Court. Santander UK announced on Monday that it would postpone its third-quarter results due to the court ruling.

Shore Capital analysts said the Court of Appeal judgement had “cast an even longer shadow of insecurity over the motor financing industry. This could have significant implications for lenders…in terms of possible redress/remediation cost.

One question that remains is whether this ruling can be extended to other lending agreements in which a commission is paid to a third-party as an incentive for distributing a loan.

The ramifications could be enormous if this included mortgage distribution which is an industry that is heavily intermediated, although there is no indication at this point that this is the case.

Jefferies analysts said that the rulings were not limited to motor financing. The ruling could theoretically also apply to the commissions paid to brokers for other financial products.

The Court of Appeal stated that lenders may be breaching their fiduciary duties to consumers when commission payments are partially concealed. It also stated that the proof of hidden commission payments by lenders would depend on each case. This will limit the chances of the ruling having an impact on the entire auto finance market.

Jefferies analysts said that the bar to prove secrecy, or “fully informed consent” may be higher on other markets.

The Financial Conduct Authority, the City regulator is currently examining the market for car loans. The court’s decision on Friday is likely to have an impact on the outcome of this investigation. It could lead to the FCA ordering that lenders pay billions of pounds to borrowers. Before the Court of Appeal’s ruling, it was expected that the result of the review would not be good.