UK Supreme Court ruling could sharply cut bank compensation liabilities

Market experts have scaled back their forecasts on the potential compensation banks might owe consumers as the UK Supreme Court prepares to deliver a highly anticipated judgment on hidden commissions tied to car loans.

The ruling, expected this Friday, follows an October decision by the Court of Appeal that triggered a wave of compensation claims from car buyers who said they were misled by undisclosed commissions paid by banks to dealerships. The case has since become a flashpoint for the UK financial sector, with billions of pounds potentially at stake.

Supreme Court ruling could sharply cut bank compensation liabilities

However, analysts now believe the Supreme Court could limit the scope of the earlier judgment, reducing the estimated financial hit to banks and likely curtailing the ruling’s ripple effects across other commission-based industries.

“There has been a shift downwards in consensus estimates of redress costs for banks by about 20 per cent,” said Benjamin Toms, analyst at RBC Capital Markets. He added that growing sentiment among legal experts suggests the top court may partially reverse the Court of Appeal’s position.

Toms recently revised his estimates, lowering the projected industry-wide compensation cost — spanning banks and non-banks — by 30%, down to £11 billion. That figure, he noted, remains “well below consensus expectations.”

Jefferies banking analyst Jonathan Pierce also expects a more favourable outcome for lenders. He believes the potential liability for Lloyds Banking Group, the UK’s largest car finance provider through its Black Horse arm, could fall from £4 billion to no more than £2 billion.

Pierce, who attended the April Supreme Court hearings, pointed out that judges appeared to scrutinize key issues like fiduciary duty and dishonest assistance — suggesting a narrower interpretation could emerge.

HSBC had previously estimated the scandal could cost lenders up to £44 billion, including £10 billion in administrative costs. However, the bank returned that projection after the analyst responsible for the figure departed the firm.

Simon Crown, financial regulation partner at Clifford Chance, echoed the market’s cautious optimism: “Most likely the Court of Appeal decision won’t be fully upheld, but the judgment will be somewhere in between.”

Regulators target misleading legal claims amid surge in ‘no-win, no-fee’ offers

Meanwhile, millions of UK consumers are being targeted by “no-win, no-fee” legal services offering to pursue compensation claims. The rise in such offers has sparked concern from regulators, who worry some firms may be exploiting claimants.

On Thursday, the Solicitors Regulation Authority (SRA) and the Financial Conduct Authority (FCA) issued a joint warning about “poor practices.” The agencies noted that consumers could face fees as high as 30% of their redress.

The SRA is currently investigating 73 law firms over possible breaches of high-volume claims protocols. “Where we find cases where firms are not acting in the best interest of their clients, we will investigate and take action,” said SRA chief executive Paul Philip. The FCA also revealed that 224 misleading car loan redress advertisements had been amended or removed over the past year.

Should the Supreme Court ruling favor claimants, the FCA is considering a formal redress scheme offering free access to compensation claims to protect consumers. The watchdog urged firms to inform clients of this potential option and disclose any exit fees.

Some consumers involved in no-win, no-fee cases have been warned they could be charged up to £175 an hour if they withdraw. “Any fee must be reasonable and reflect the work actually undertaken,” said the regulator.

Experts warn of broader legal risks if ruling sets wide precedent

Even if the banks win the legal battle, they still face billions in compensation claims over discretionary commissions, encouraging dealers to arrange loans with inflated interest rates.

There are also lingering concerns that the Court of Appeal’s earlier ruling could pave the way for similar lawsuits across sectors such as insurance, consumer credit, and price comparison services — all of which use commission structures.

However, legal experts anticipate that the Supreme Court will set limits. Julius Grower, a commercial law professor at the University of Oxford, believes the judges will clarify the scope of fiduciary duties and narrow the potential for future litigation.

“The problem with the Court of Appeal judgment, as far as the banks were concerned, was that it held there was a fiduciary duty in every relationship between a car dealership and consumer,” Grower said. “And that, simply by paying a commission, the bank was deliberately dishonest in suborning that.

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