Motor finance: What does the Supreme Court ruling mean?

In a decision that has implications for millions of customers and the motor finance industry, the UK Supreme Court ruled that car dealers are not liable for hidden commission payments in car finance schemes. 

Here is everything that happened.

What is the background to the court case?

Between 2007 and 2021, some car dealers earned hidden commissions from lenders when arranging finance for customers. 

In some cases, the dealers had discretion over how much commission to charge, which incentivised more expensive loans for the customer.

On Friday, 1 August, The Supreme Court ruled that lenders are not liable for hidden commission payments, meaning that most of the claims will not go ahead. However, the most serious claims will be eligible for compensation. 

However, the FCA said that many motor finance firms were not complying with rules or the law by not providing customers with relevant information about commission paid by lenders to the car dealers who sold the loans.

The ruling came after two lenders, FirstRand Bank and Close Brothers, challenged a Court of Appeal ruling which found “secret” commission payments, paid by buyers to dealers as part of finance arrangements made before 2021, without a motorists’ fully informed consent, were unlawful.

The ruling in October last year found that three motorists, who bought their cars before 2021, should receive compensation after they were not told either clearly enough or at all that the car dealers, acting as credit brokers, would receive a commission from the lenders for introducing business to them.

Will customers receive a payout? 

Motor finance customers could receive a payout after the FCA announced it will consult on an industry-wide compensation scheme.

While some motor finance customers will not get compensation because in many cases commission payments were legal, the court ruled that in certain circumstances the failure to properly disclose commission arrangements could be unfair and therefore unlawful.

The FCA estimates that most individuals will probably receive less than £950 in compensation, but the total cost of any compensation scheme is estimated to be between £9bn and £18bn. 

The consultation will be launched by early October. If the compensation scheme goes ahead, the first payments should be made in 2026.

According to MoneySavingExpert founder Martin Lewis, up to 40 per cent of people who financed a car during the period of 2017 to 2021 could qualify for payment.

Motorists are being encouraged to submit a DIY complaint if they believe they overpaid.

Nikhil Rathi, chief executive of the FCA, said: ‘It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.

‘Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.

‘It will take time to establish a scheme but we hope to start getting people any money they are owed next year.’

Impact on the motor sector 

According to Nicola Pangbourne, partner at law firm Kennedys, the Supreme Court ruling is “welcome news to many sectors, including lending institutions, car dealerships and vehicle manufacturers.” 

“It also makes the prospects of an FCA implemented sector wide redress scheme under the Financial Services and Markets Act 2000 less likely. This is based on its submissions to the Supreme Court, which suggested that it considers its rules, and the obligations placed on lenders regarding commission, to be sufficiently balanced to protect consumers.

“The FCA could still implement its redress scheme regardless of the Supreme Court judgment.  However, the FCA does not lightly order sector wide redress scheme and it appears to recognise that such schemes can also have negative consequences for consumers.  For example, if it caused lenders to withdraw from providing motor finance, it could reduce competition and could make it more expensive for consumers to borrow money to buy a car in the future.

“It remains to be seen whether this judgment will have an impact on how the Financial Ombudsman Service deal with complaints about motor finance. 

“The FOS is not bound by legal precedent and is not obliged to follow legal principles when reaching a decision.  It may therefore take an entirely different view to the Supreme Court when considering whether consumers who availed themselves of the benefits of motor finance deserve to be compensated.”