It was, at least, far better than the City feared. Shares in banks and finance houses such as Lloyds and Close Brothers were soaring on the London market this morning after the Supreme Court rejected claims that they potentially owed tens of billions in mis-sold car finance. Instead, they are likely to get away with a mere £9 billion to £18 billion instead. But this still doesn’t address a pretty important question: it is not really clear why Britain’s motorists deserve a few billion from the banks. All it is doing is putting us on a slippery slope to an out-of-control compensation culture.
A lot of holidays will be paid for with the spare cash
After the markets closed on Friday, the Supreme Court surprised the City by finally making a sensible decision. It rejected the bulk of the claims that the main banks and finance houses had mis-sold millions of car finance packages by not fully disclosing the commission paid on the deals. It ruled, perfectly reasonably, that the terms were mostly set out in the small print, and, anyway, anyone buying a car already knew that the trade, to put it politely, has never been famous for its scrupulously fair dealings with customers, so people should have checked what they were signing.
These claims could have run to £40 billion or more. On the news, Lloyds shares jumped by 8 per cent, and Close Brothers by 34 per cent. It was a relief for shareholders – and also for the government, which could hardly afford to bail out any lenders who might be bankrupted by the payouts.
The trouble is, the Financial Conduct Authority is now planning a more limited compensation scheme to cover cases where commissions and interest on car loans were excessively high. It could still cost between £9 billion and £18 billion, with motorists getting around £950 each. Given that almost everybody who buys a car uses some form of finance scheme, it could provide a useful bonus for millions of families. A lot of holidays will be paid for with the spare cash.
And yet, it is very hard to see the point. After all, the payout won’t be very significant to any individual. In reality, many of the complaints are widely inflated by ambulance-chasing lawyers and claims management companies who rake off huge fees. The problem for the UK is that we are fast developing an American-style system of mass consumer litigation, with all the expense and uncertainty that creates, but without the American levels of productivity and innovation to make up for it. It is the worst of all worlds. The £950 handed out to motorists won’t make much difference to any of them. But it will make the UK a far worse place to run a finance business – and that matters far more.
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