The Financial Conduct Authority (FCA) pushed back against a sweeping court ruling that could force banks to pay out billions in motor finance compensation, which may limit payouts but complicate the compensation process, according to research from RBC Capital.
Submitting its views to the Supreme Court, the FCA said the Court of Appeal had gone “too far” by assuming all car dealers owed customers a fiduciary duty - meaning a legal obligation to act in their best interest.
Instead, the regulator argued that each case should be judged on its own facts. If lenders clearly disclosed the possibility of commissions in their terms and conditions, it said, they may not be liable. But where payments were kept secret or commissions unusually high - as in the case of one claimant, who paid £1,650, claims could stand.
RBC analysts believe this case-by-case approach complicates the creation of a blanket compensation scheme expected later this year.
The total cost for UK banks could exceed £10 billion in a worst-case scenario, with Lloyds Banking Group PLC (LSE:LLOY), Close Brothers and Santander among those most exposed.
The Canadian bank also warned of reputational damage and the risk of overlapping claims, if courts allow double recovery.
The FCA’s intervention may limit payouts in some cases. But for banks such as Close Brothers and Lloyds, the size and scale of potential liabilities remain significant, particularly if the final court ruling aligns with the earlier appeal judgment.
RBC said banks will be keen to demonstrate they were transparent about commissions, as this could offer a route to avoid compensation.
Either way, investors hoping for clarity will have to wait for the Supreme Court’s verdict later this year. Until then, the threat of a sector-wide hit remains very real.