The UK Supreme Court has delivered a landmark judgment curbing widespread compensation claims by motorists over undisclosed commissions paid on car loans, ruling in favour of finance companies in two of three major test cases. The decision narrows the scope of potential payouts after earlier courts had signalled a possible wave of claims comparable to the PPI mis-selling scandal, affecting millions of drivers who took out motor finance deals before 2021.
Finance companies largely succeed in challenge to commission claims
In a joint hearing encompassing three appeals, the Supreme Court examined disputes brought by lenders FirstRand Bank and Close Brothers, who challenged a 2022 Court of Appeal decision. That ruling had found it unlawful for car dealers to receive undisclosed commission payments from lenders also known as “commission wrap” arrangements when customers were signed up to motor finance agreements before 2021.
This earlier judgment opened the door for millions of motorists to seek compensation, potentially costing the industry billions of pounds in redress over interest rates inflated due to hidden dealer commissions. However, the Supreme Court’s decision on 31 July 2024 overturned two of the three key rulings, substantially limiting the possible claims.
Lord Reed, delivering the court’s judgment, explained that the motorists had argued dealers owed them a fiduciary duty a legal obligation to prioritise the customer’s interests over their own commission gains. However, the court disagreed, noting: “At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller.”
The judgment means that for most cases, the relationship between dealer, lender, and customer does not meet the threshold for unfairness sufficient to warrant compensation.
Exception made for disproportionately high commissions
The court did, however, find in favour of one claimant, Marcus Johnson, whose dealer received a staggering 55% of the total charge for credit, including interest and fees. The Supreme Court ruled that this represented “a powerful indication” of an unfair relationship between Johnson and FirstRand Bank, awarding him compensation equivalent to the disputed commission plus interest.
Speaking after the ruling, Johnson expressed mixed feelings: “I’m pleased for myself, but not for the hundreds of others who will miss out,” he said. “It’s a win, but it’s a really big bag of salt to go with it.”
Background and scale of motor finance in the UK
According to the Financial Conduct Authority (FCA), approximately two million new and used vehicles are purchased annually using some form of motor finance in the UK roughly nine in ten sales. Before 2021, up to 40% of these finance deals involved now-banned discretionary commission arrangements (DCAs), whereby dealers earned higher commissions for securing loans with higher interest rates.
The FCA has been investigating these practices amid consumer complaints, as DCAs raised concerns that dealers’ incentives could lead customers to pay more than necessary.
Industry and regulator responses
While the Supreme Court ruling excludes many potential claims tied to general undisclosed commissions, experts warn that significant redress could still be owed relating to discretionary commission arrangements.
Richard Barnwell, partner at advisory firm BDO, noted that “if discretionary commission arrangements are deemed to be an unfair relationship, redress could still run from £5 billion to £13 billion or more.”
Martin Lewis, founder of MoneySavingExpert.com, echoed these concerns, estimating compensation payments could total around £10 billion. “I would be gobsmacked if there is not a scheme for DCA payments,” Lewis said. He expects the FCA to launch a consultation soon regarding possible compensation schemes for affected consumers.
The FCA has stated it will confirm “whether we will consult on a redress scheme before markets open on Monday 4 August,” emphasizing the importance of “bringing greater certainty for consumers, firms and investors as quickly as possible.”
Alex Neill, co-founder of consumer rights group Consumer Voice, described the ruling as “disappointing” but welcomed the clarity it provided about where consumers merit compensation. He urged the FCA to act promptly to devise an effective redress scheme ensuring motorists “get back what they’re owed.”
Industry welcomes clarity amid uncertainty
From the finance sector, Stephen Haddrill, director general of the Finance and Leasing Association (FLA), called the Supreme Court’s decision “an excellent outcome” that “restored certainty and clarity” to the motor finance market.
A Treasury spokesperson also issued a statement, affirming that the government “respected the judgment” and would “work with regulators and industry to assess the impact for businesses and customers.”
Commission controversies and regulatory evolution
The controversy over hidden commissions in motor finance echoes the high-profile Payment Protection Insurance (PPI) mis-selling scandal that cost UK financial institutions over £50 billion in compensation. While the PPI crisis ultimately led to transformative reforms and tighter consumer protections, the motor finance market has only recently come under intensified scrutiny.
In 2021, the FCA banned discretionary commission arrangements in motor finance, citing concerns they incentivise dealers to pressurise consumers into costlier deals. With the regulatory spotlight now on transparency and fairness, the industry faces increased pressure to ensure that consumer credit agreements are offered responsibly.
Future outlook: Impact and possible reforms
While the Supreme Court ruling reduces uncertainty for lenders, the FCA’s ongoing investigations and possible compensation schemes signal that further financial consequences lie ahead, particularly for deals involving banned discretionary commissions. The scale of potential payouts running into billions of pounds underscores the continuing financial and reputational risks for the motor finance sector.
Consumer advocates argue that only a robust and comprehensive redress scheme will restore trust and fairness for millions of motorists who have unknowingly paid inflated interest rates.
As Martin Lewis concluded, “This is far from over. We can expect further regulatory actions and industry adjustments in the coming months to address the remaining concerns.”
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