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Car loan providers have failed in an attempt to block mass lawsuits over hidden commissions, adding to a legal threat facing the sector after two lenders claimed a £9.1bn compensation scheme violated their human rights.
Judges on Tuesday dismissed an appeal brought by lenders including Black Horse, an arm of Lloyds Banking Group, which sought to stop lawyers bringing so-called omnibus claims on behalf of thousands of motorists.
Lenders are trying to contain the damage from the multibillion-pound motor finance scandal, which stems from commissions paid to dealerships when car buyers took out loans.
The UK Financial Conduct Authority has set up a redress scheme in response to litigation over the hidden commissions, which culminated last year in a ruling from the UK Supreme Court.
However, payouts are on hold after several lenders brought a legal challenge against the FCA, with an initial hearing in that separate case taking place at a tribunal in London this week.
Lawyers for Volkswagen’s financing arm and French bank Crédit Agricole told the tribunal that the redress plan interfered with their property rights under the European Convention on Human Rights.
They, along with Mercedes-Benz Financial Services, said the scheme was unlawful and criticised the methodology officials used to determine compensation payouts.
The regulator has estimated total payouts of about £7.5bn under the scheme, covering more than 12mn car loans over the period between 2007 and 2024, with a further £1.6bn in costs.
Consumer Voice, which helps those bringing compensation claims against companies, is also challenging the regulator in the tribunal case, arguing that the scheme is inadequate.
Law firms and claims management companies believe they can secure higher awards for consumers by launching mass claims against lenders via the courts.
In the Court of Appeal case, the eight lenders sought to overturn a High Court judgment last year that gave a green light to the omnibus claims brought by law firm Barings.
The lenders, including the financing arms of Volkswagen, BMW and Stellantis, alongside Black Horse, argued each motorist’s claim was “fact-specific” so should not be resolved by the courts in bulk.
But the Court of Appeal on Tuesday sided with the claimants, paving the way for mass compensation demands outside the redress scheme.
The FCA has insisted its own, out-of-court compensation scheme is the “quickest, simplest and most efficient way for firms to put things right”.
“Our compensation scheme is fair to consumers, proportionate for firms and would put £7.5bn back into people’s pockets. It has broad support and most lenders are committed to implementing it,” the regulator said.
Under the FCA’s plans, lenders have to calculate refunds based on either a 17 per cent or 21 per cent reduction in the annual interest on a loan, depending on when it was taken out.
But lawyers for Volkswagen Financial Services, led by Richard Handyside KC, said in a written submission that the percentage reductions to the annual interest rates were “not reasonable proxies for loss and are not evidentially supported”.
While the lender “strongly supports the introduction of a consumer redress scheme in relation to motor finance agreements”, they said, “any such scheme must be lawful”.
The VW lawyers said the FCA’s specific scheme amounted to “a disproportionate interference” with the company’s property rights, as the regulator “could have designed a more targeted and proportionate scheme that met its objectives”.
Lawyers for Crédit Agricole also said there were “multiple flaws in the FCA’s apparent approach to deriving” the interest rate adjustments.
Consumer Voice told the tribunal that it believed the FCA had been too generous to the lenders in its calculation of the redress owed to consumers, as well as the interest due.
However, the FCA told the tribunal that Consumer Voice might lack a “sufficient interest” to bring its challenge because it would neither pay nor receive redress in the scheme and it had not properly explained its funding.
