The UK Financial Conduct Authority (FCA) has announced plans to consult on a large-scale compensation scheme for victims of car finance mis-selling, following a landmark Supreme Court ruling clarifying the legality of hidden commissions in car loan deals. The regulator estimates millions of motorists could be eligible for payouts averaging less than £950 per agreement, with payments expected to begin next year.
Supreme Court Decision Clarifies Legal Status of Hidden Commissions
On Friday, the Supreme Court reversed earlier judgments from lower courts that had deemed the practice of lenders paying hidden commissions to car dealers on loan agreements unlawful. The ruling, handed down in a closely watched case involving specialist lenders Close Brothers and South Africa’s FirstRand Bank, concluded that such commissions are generally lawful unless they reach an excessive level that creates unfairness in the lender-consumer relationship.
The court specifically highlighted one test case involving consumer Marcus Johnson, where the dealer received a commission amounting to 55% of the total cost of credit including interest and fees. In this instance, the court found the commission “a powerful indication” of unfairness and ordered compensation of the full commission amount plus interest.
The FCA described the verdict as providing much-needed “clarity” after years of conflicting court rulings. FCA Chief Executive Nikhil Rathi stated: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.”
Details of the Proposed Compensation Scheme
Following the ruling, the FCA revealed plans to launch a consultation in October on the design and scope of a redress scheme. It estimates the total cost to the industry could range between £9 billion and £18 billion, funded entirely by lenders and dealers without recourse to taxpayers.
The regulator indicated that the average payout per affected car finance agreement would likely be below £950, though individual compensation could vary depending on the nature and scale of the commission involved. The scheme is expected to cover contracts dating back to 2007, but the FCA acknowledged challenges related to the availability of historical transaction records.
An FCA spokesperson explained: “It’s difficult to estimate precisely at this stage the full cost to industry or exact eligibility criteria. However, we anticipate requiring firms to proactively inform customers if they may be entitled to compensation.”
The FCA also advised customers who believe they might be eligible to contact their car finance provider directly rather than engaging costly claims management companies. “Using a claims management firm or law firm can significantly reduce the amount of redress you receive,” Rathi cautioned.
The Finance & Leasing Association, representing many lenders and dealers, expressed concerns about the feasibility of administering a fair scheme covering contracts as old as 2007: “We are worried about whether it is possible to have a fair redress scheme that goes back so far, given many firms do not hold such dated information,” a spokesperson said.
Background: The Controversy Over Discretionary Commissions
This issue stems from widespread industry practices involving discretionary commission arrangements (DCAs), which the FCA banned in 2021. Under DCAs, a car dealer’s commission from lenders was linked to the interest rate charged to the customer, incentivizing dealers to push higher rates and resulting in consumers paying more than necessary.
The FCA found that DCAs created conflicts of interest, harming consumers by inflating loan costs. Since January 2023, the regulator has evaluated whether customers with such agreements made prior to the ban are owed compensation.
Roughly 80,000 open complaints related to DCA mis-selling were on hold pending the Supreme Court’s verdict, which now determines the legal framework for compensation. The FCA’s planned scheme is expected to encompass DCAs that were not properly disclosed, as well as cases involving high commissions outside of DCAs, exemplified by the Marcus Johnson ruling.
Broader Impact on the UK Car Finance Market
The vast majority of new car purchases and many second-hand transactions in the UK rely on finance agreements. Industry experts warn that an expensive compensation scheme could have ripple effects on the affordability and availability of vehicle loans.
Rachel Reeves, Chancellor of the Duchy of Lancaster, attempted in February to intervene in the Supreme Court case, expressing concerns over potential market disruption. However, the court declined the government’s application for intervention.
The FCA maintains that any redress scheme will be designed carefully to avoid undermining a healthy and competitive car finance market. In a statement, the regulator said it “expects a robust and accessible finance market for new and used cars to continue notwithstanding any proposals we put forward.”
Expert Perspectives and Consumer Guidance
Consumer rights groups have broadly welcomed the Supreme Court’s recognition that excessive commissions constitute unfair practice, though some warn that the compensation amounts may be modest relative to losses incurred.
Mike Brewer, CEO of the consumer advocacy group Fair Finance UK, commented: “While the ruling is a step forward for customers, the less than £950 average payout suggests many people will see only partial redress for what may have been inflated loan costs.”
Financial analyst Dr. Sarah Millar of the London School of Economics noted: “The FCA’s compensation proposals signal a major adjustment for the car finance sector. Compliance costs could drive lenders to change or restrict lending, affecting consumer choice.”
The FCA urges consumers with concerns to check existing loans and finance agreements and to raise complaints directly with providers if they suspect unfair commissions. The regulator’s consultation later this year will invite input from consumers, industry stakeholders, and legal experts on the compensation framework.
La Recherche Avance
The FCA’s consultation, expected to launch in October 2023, will determine the eligibility criteria, compensation calculations, and administrative processes for the scheme. Given the vast number of potential claimants and the complexity of historical contracts, redress payments are unlikely to begin until 2024.
This decision marks a significant development in consumer financial protections, clarifying lender obligations and establishing a pathway for reconciling past mis-selling abuses in car finance. The FCA and industry participants will now seek to balance fair compensation with maintaining market stability and access to affordable vehicle loans.
Pour une analyse plus détaillée et une couverture continue des marchés du travail américains, des politiques commerciales, du gouvernement, des finances et des marchés britanniques, restez à l'écoute de PGN Business Insider.
