An investability problem' Legal ruling leaves motor finance industry in a spin

A cloud of anxiety was hanging over the British Motor Museum. Alongside showrooms featuring the 1988 Le Mans-winning Jaguar XJR-9 and the Land Rover Defender used in the opening scenes of the James Bond film Skyfall were conference rooms filled with worried lawyers, bankers and compliance staff from across the motor lending industry.

- Kalyeena Makortoff

Attenders at the Finance & Leasing Association's (FLA) annual motor finance convention in Warwickshire last month had spent weeks grappling with a shock court of appeal decision that sided with two aggrieved car loan customers.

In October, judges ruled that paying commission to car dealers who arranged the loans, without disclosing the sum and terms of that commission to borrowers, was unlawful. But what judges deemed to be "secret" arrangements had actually been standard practice across the industry, and within City rules, for years.

Lenders started to panic. The ruling had opened the door to a fresh flood of claims - not just from borrowers but a voracious claims management industry that had been waiting for a payment protection insurance (PPI)-style consumer scandal for years. And it was not just car loans that could be affected by the court ruling: finance on everything from sofas to new kitchens could be in scope.

With the ratings agency Moody's forecasting a compensation bill of up to £30bn and the Bank of England predicting a misconduct bill of up to £25bn, claims companies and specialist law firms - including Bott and Co, Courmacs Legal, and The Claims Guys - could be in line for a massive payday. And investors, including UK and US private equity firms, are hoping to pile in.

The bulk of the FLA convention was dedicated to the ruling and its potential fallout. "It wasn't the elephant in the room - it was topic number one on the agenda," one attender said.

Claims management companies (CMCs) found their footing in the UK in the early 2000s, filing compensation claims on behalf of consumers, often on a "no win, no fee" basis. The catch for consumers? Having to shell out a 40%-plus cut of any payout.