British auto lenders have reached a critical milestone in a multi-billion-dollar legal dispute: The Supreme Court has allowed their appeal against a landmark judgment that could potentially expose the financial industry to billions in compensation claims.

The focus of the case is on "hidden" commissions that banks paid to car dealers without informing the customers. In October, the Court of Appeal ruled that this practice is inadmissible, triggering a wave of claims for reimbursement.

The Financial Conduct Authority (FCA) had already launched a review of commissions in the auto loan market in January. Discretionary commissions, which encouraged dealers to agree on higher interest rates, were banned in 2021. However, the Court of Appeal's judgment extended the issue to fixed fees, affecting even more loans.

After the verdict, lenders reacted frantically: Close Brothers paused all new car loans, while Lloyds Banking Group, whose subsidiary Black Horse is a market leader in car loans, temporarily suspended commission payments. Both companies have made significant provisions: Lloyds 450 million pounds, Close Brothers 400 million pounds.

The British auto loan market had a volume of £52 billion in 2022. Analysts at Moody’s estimate that the total compensation costs for auto lenders could reach up to £30 billion. This case shows parallels to the Payment Protection Insurance scandal, which ultimately cost the banking industry £50 billion.

The FCA is considering an industry-wide compensation scheme to deal with the expected flood of consumer lawsuits. This could involve either a system-wide regulation where banks proactively offer compensation or a complaint-based solution where affected parties must actively make claims.

Stephen Braviner Roman, General Counsel of the FCA, stated that further decisions would only be made once clarified by the Supreme Court. Industry representatives like Adrian Dally from the Finance and Leasing Association welcomed the appeal as "very good news" and emphasized the importance of legal clarity for the future of the sector.

The hearings before the Supreme Court, led by Lord Robert Reed, are scheduled to take place between January and April 2024. The final verdict is eagerly awaited, as it could impact not only the auto loan market but also other areas of British consumer credit.