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UK Car Loan Scandal: Banks Face Billion-Dollar Fallout

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Banks may have to pay out tens of billions of pounds if the British Supreme Court upholds a judgment ruling controversial car loans are unlawful, in a case beginning in April.

These loans motivated car dealers to present elevated interest rates as they received increased commissions, often failing to adequately disclose this information to borrowers.

Consumer association Which! estimated that millions of drivers would become eligible for compensation if the UK’s highest judicial authority sides with borrowers.

The government, however, sought to intervene in the case amid concerns over the economic fallout.

“A such large amount might restrict banks’ capacity and desire to loan money and extend credit particularly when the economic forecast continues to be unpredictable,” stated AJ Bell investment director Russ Mould.

“This could be the reason why the government is looking to step in,” he noted.

Marcus Johnson is among the claimants whose cases are currently being reviewed by the Supreme Court.

In 2017, he obtained a loan to purchase a Suzuki Swift from a dealership in Cardiff, Wales, for £6,500 ($8,400). Unbeknownst to him at the time, the interest on this loan was financing a commission amounting to more than £1,600.

In October, the Court of Appeal sided with Johnson, instructing South African bank FirstRand to return the commission along with interest payments–an outcome that caused widespread anxiety throughout the financial industry.

The Supreme Court has scheduled his case for April 1, alongside another related matter involving FirstRand and a separate case against British bank Close Brothers.

Should the court rule in favor of the borrowers following the three-day hearing, this could establish a nationwide precedent for comparable cases, possibly leading to billions in payouts.

The Supreme Court stated in its case summary that ‘in all three interconnected appeals, the claimants were financially inexperienced consumers with relatively modest earnings,’

It has rejected the government’s attempt to intervene.

£44 billion

In preparation for the ruling, British banks have set aside considerable sums, including Lloyds Bank, which has earmarked nearly £1.2 billion.

Which! believes it could cost banks as much as £16 billion, whereas some other analysts anticipate even larger figures, with estimates from HSBC indicating potential costs reaching up to £44 billion.

This would place it on par with the PPI scandal, during which major UK High Street banks allegedly distributed around £45 billion to £50 billion collectively, according to Mould.

In 2021, the Financial Conduct Authority prohibited undisclosed commissions and initiated an independent probe into the matter at the beginning of the previous year.

The regulatory body intends to hold off on initiating an automated compensation program until after the Supreme Court has made its decision.

“Even if the Supreme Court upholds the Court of Appeal judgement, it could act to limit and reduce any compensation payments, and that could well represent the best-case scenario for the lenders,” Mould added.

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