As the UK Supreme Court prepares to rule on whether car finance providers broke the law by failing to disclose commission arrangements to borrowers, a central question is coming into focus: how do lenders, such as Lloyds, justify claims of “no harm” to customers while setting aside billions of pounds for potential redress?
Lloyds Banking Group, the UK’s largest motor finance lender, is at the centre of this debate. CEO Charlie Nunn told MPs on 20 May that Lloyds had seen “no evidence of harm” in its car finance activities and argued that its motor finance arm, Black Horse, typically offered some of the lowest interest rates in the market. On that basis, he said, customers were unlikely to have found better deals elsewhere, even if dealer commissions were not disclosed.
But the bank has also made two significant financial provisions. A £450 million charge was booked in late 2024 concerning the Financial Conduct Authority’s (FCA) review of discretionary commission arrangements (DCAs). A second, £700 million provision followed earlier this year, after the Court of Appeal ruled that the non-disclosure of commissions could give rise to a claim in other consumer credit spaces beyond motor finance. This appears difficult to square with a claim of no customer detriment.
Nunn, however, told the Treasury Select Committee that these charges should not be interpreted as admissions of harm but viewed as a result of unavoidable accounting principles.
"That £450 million provision incorporates two things. One is the operational expenses of responding to claimant law firms. We have had a very large number of complaints that aren’t even from our customers, so we know there are significant operational expenses in processing and trying to help customers. I don’t know if they even had a policy with us, but there is a very high percentage of those. It is processing the operational complaints, supporting the customers and, if there is remediation linked to harm, paying out that remediation.
"We haven’t disclosed the split between those two things, but we obviously have experience. The operational expenses are very significant. We knew, based on actions that the FCA has announced, that we were going to incur significant costs. From an accounting perspective, we are legally obliged to do that. That is not linked to decisions that the FCA and Supreme Court will take on whether there was a breach of a law, whether there was harm, and if there was harm, whether appropriate remediation should be made. All those steps are independent of the accounting provision. I know that probably isn’t helpful for the public, but that is the basis on which we make those decisions," he told the Committee.
Even so, these provisions may also reflect the scale and complexity of proving no harm, rather than simply responding to complaints. Julian Rose, Director at Asset Finance Policy Limited, has pointed out that under the current FCA regime, the burden of proof lies with lenders. If the Supreme Court confirms that firms were required to disclose commissions, it will fall to the lenders to demonstrate that customers were not financially disadvantaged.
“In my view,” Rose writes, “it will not be for consumers (or their representatives) to show evidence of harm. It will be for the car finance companies to show evidence of no harm. That means for each agreement, they will need evidenced that the rate provided was competitive with an industry benchmark rate.”
That challenge will be especially difficult if firms no longer hold the necessary data. But will it prove more expensive for claimants or lenders when there's poor data?
Most lenders follow standard data retention policies that delete customer records after six years. According to a recent Guardian report, claims firm Courmacs Legal says it holds around 465,000 customer complaints involving loans settled before 2018, many of which may now be missing documentation. If these consumers cannot be contacted or their agreements reviewed, they could lose out on up to £1.18 billion in compensation, Courmacs estimates.
In January 2024, the FCA instructed firms not to delete car finance records while its investigation continued. But that came too late for many historical agreements. In a statement to the Guardian, the FCA said: “If we decide to undertake a redress scheme, we will work with industry and other interested parties to ensure that it is as clear and straightforward as possible for customers to complain.”
The Financing and Leasing Association (FLA), which represents major lenders including Lloyds, Santander UK and Close Brothers, has acknowledged the limitations of missing data. “We have made clear to the FCA that consistent and fair outcomes cannot be delivered with patchy or absent data,” the FLA said.
While the FCA has not yet confirmed whether a formal redress scheme will be introduced, a ruling in favour of borrowers by the Supreme Court would put pressure on the regulator to act. And if a scheme is mandated, firms will need robust documentation systems to avoid defaulting to redress.
This may explain why Lloyds has already put aside more than £1.1 billion, regardless of its position that customers were not harmed. If the bank intends to prove that its loans were competitively priced, the ability to evidence that across thousands of legacy agreements will be critical — and expensive.
As Rose argues, operational readiness will be key. “There needs to be a standard table showing benchmark rates for similar loans and for similar customers,” he notes. “Where the customer paid near the benchmark or below it, then it should be reasonable to assume there was no harm.”
In the absence of such evidence, however, lenders will struggle to prove their case. Lloyds may not have admitted liability, but its financial provisions suggest it is preparing for a process where outcomes may hinge not on clear evidence of harm, but on the inability to demonstrate that harm did not occur.
"Lloyds faces questions on ‘no harm’ claims amid mounting provisions" was originally created and published by Motor Finance Online, a GlobalData owned brand.
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