Lenders have avoided potentially having to pay compensation to millions of drivers after a landmark court decision – although many could still be owed money.
The UK Supreme Court has overturned two of the three rulings brought before it in a high-profile car-finance commission case.
Three drivers said they 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 lenders for introducing business to them.
The Court of Appeal originally found in favour of the drivers, but after appeals were brought before the Supreme Court, one has been upheld, but two of the decisions have been reversed.
Announcing his decision, Lord Reed, President of the Supreme Court, said that in the case of the claim he was upholding, “the relationship between [the claimant] and the finance company was unfair”.
Last year, HSBC estimated the scandal could have cost lenders £44bn in compensation, though this could now be lower because two of thw lower court’s decisions have been reversed.
Here is what the ruling said, what happens next and what it means for people who bought with car finance.
The Supreme Court was deciding whether or not to uphold an earlier ruling which found that hidden commission payments to car dealers were unlawful.
The case concerns complaints related to the non-disclosure of commission which applies to nearly all car finance cases.
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When people buy a car on finance, they are effectively loaned the money, which they subsequently pay off in monthly instalments. These loans come with interest attached and are organised by brokers – the people who sell the finance plans.
The brokers earn commission which is a percentage of the interest payments.
Last year, an Appeal Court ruled in favour of three car buyers who claimed that hidden commissions on their car purchase deals unlawfully added thousands of pounds to the cost.
But an appeal was lodged by the car finance firms involved – Close Brothers and South Africa’s FirstRand – which went to the Supreme Court.
The cases were set to be used as precedent for others involving similar situations.
What did the Supreme Court decide?
Britain’s highest court overturned the previous ruling that car dealers should have informed the customers about commissions paid by banks when they arranged the car loans, and that these commissions amounted to “bribes”.
Mr Johnson, Mr Wrench and Ms Hopcraft – the three claimants – all used car dealers as brokers for finance arrangements for second-hand cars, all worth less than £10,000, before January 2021.
Only one finance option was presented to the motorists in each case, with the car dealers making a profit from the sale of the vehicle and receiving commission from the lender.
The commission paid to dealers was affected by the interest rate on the loan.
The schemes were banned by the FCA in 2021, with the three drivers taking legal action individually between 2022 and 2023.
In the first case, Ms Hopcraft, then a student nurse, bought her replacement car in 2014 through an agreement with Close, which paid the car dealership £183.26 in commission. In the second case, Mr Wrench entered into two hire-purchase agreements for an Audi TT coupé and a BMW 3 Series, with FirstRand, in 2015 and 2017 respectively, paying hundreds in commission in total. In the third case, Mr Johnson, then a factory supervisor, was buying his first car in 2017 and paid £1,650.95 in commission as part of his finance agreement with FirstRand for a Suzuki.Of the three motorists, who all bought their cars before 2021, only Mr Johnson had his complaint upheld by the Supreme Court.
This was due to an “unfair” relationship between a customer and a finance company.
The fact this case was upheld suggests the door is not fully closed for motor finance complaints.
It is yet to be determined exactly what the ruling means for consumers. Some may still be able to claim compensation.
Martin Lewis, of MoneySavingExpert, said: “My suspicion is the FCA will within weeks announce consultation on a redress scheme for discretionary commission cases.
“You may not even have to claim it, it could be automatic. And with excessive commissions I suspect more guidance will come on that at a similar time.
“If you sign up to a claims firm now, you may have to give it a cut even if it does nothing. So just sit on your hands for now.”
Brian Nimmo, Head of Redress at independent financial services consultancy Broadstone, said: “Providers are not out of the woods yet as discretionary commission arrangement (DCA) cases will now need to be looked at on a case-by-case basis.
“The FCA is expected to develop its redress scheme to deal with this development, but how it will help them decide if a case is ‘unfair’ is the great unknown.
“As a result, finance companies will still need to review all of their DCA cases, assess whether they are unfair, and then calculate potential redress, which will be a significant exercise.”
Why did the Government get involved?
In February, the Government made an unusual intervention in the case, amid worries that large amounts of redress payments could upset the car market and make it less competitive, and less attractive to investors.
The Supreme Court rejected this.
The Treasury had previously said it wanted to see a “balanced judgment” that would deliver compensation proportionate to losses that consumers have suffered.
In a new statement, a spokesperson for the Treasury said: “We respect this judgment from the Supreme Court and we will now work with regulators and industry to understand the impact for both firms and consumers.
“We recognise the issues this court case has highlighted. That is why we are already taking forward significant changes to the Financial Ombudsman Service and the Consumer Credit Act.
“These reforms will deliver a more consistent and predictable regulatory environment for businesses and consumers, while ensuring that products are sold to customers fairly and clearly.”
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