Car finance: What is the court case about and what does it mean for me?
It is set to bring clarity over how the law should be applied to motor finance arrangements following a Court of Appeal decision last October.
The ruling will have much wider ramifications for the industry, and the financial services sector, and could mean millions of motorists are due compensation as a result.
What is the background to the case?
The Supreme Court – the UK's highest court – is considering an appeal against a Court of Appeal ruling made in October last year, relating to three claimants who had each bought cars on credit.
In each case, the car dealer made a profit on the sale of the car but also received a commission from the lender for introducing the business to them – which the three claimants argued they did not know about.
The Court of Appeal found that 'secret' commission payments, as part of finance arrangements made before 2021 without the motorist's fully informed consent, were unlawful.
The lenders, FirstRand Bank and Close Brothers, are challenging that decision.
Why is this case so important?
Wayne Gibbard, who leads the automotive finance practice at law firm Shoosmiths, said Friday's Supreme Court decision will be 'absolutely fundamental to what happens next' for the sector.
He said it will inform the scale of potential compensation for customers, which will be overseen by the UK's Financial Conduct Authority (FCA).
The FCA previously said that, if it thinks there was widespread harm to consumers as a result of commission payments, then it could set up an industry-wide redress scheme.
It said it will confirm within six weeks of the Supreme Court judgment whether it is planning to launch such a scheme.
Mr Gibbard stressed that this response will be particularly important going forward.
He said: 'People can make an informed decision – the query is around their harm, have they been mis-sold something?
'And I think that's been absent in the conversation.'
What does it mean for consumers?
If Supreme Court judges side with the claimants then it could mean that many people who took out a car loan before 2021 may be due a payout, although it is difficult to say at this point how many.
If it sides with the lenders, then it is likely to significantly limit the scope of potential payouts to motorists.
However, the FCA is still looking at compensation for potential mis-selling of some types of motor finance arrangements – known as discretionary commission arrangements (DCAs) – so this could go ahead regardless.
Does it mean I am entitled to compensation?
If the FCA decides to proceed with a redress scheme, it is likely to clarify what type of motor finance arrangements it applies to – and potentially include all deals where people were not told clearly enough, or at all, that the car dealer was receiving commission.
A scheme is intended to be simpler for consumers than making a direct complaint to providers.
The watchdog said it would expect 'fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive' and would be 'more orderly and efficient for firms than a complaint-led approach'.
Mahesh Vara, a legal director for Shoosmiths, said a decision that secret commission payments were unlawful would 'naturally be a boon to claimants firms and consumers'.
'I think this is one of the first large-scale consumer mis-selling 'scandals' of the social media digital age,' he said.
'It's now leading to a greater expectation of there being almost a guaranteed payment. That is what the FCA will have to consider.'
Adverts from claims management companies have sprung up significantly in the lead up to the court decision – but some regulators have been warning against using them as people may be charged for a service they ultimately do not need.
What could it mean for the wider industry?
About 80% of new cars are bought using motor finance in the UK – so the decision could have major consequences for this industry.
Mr Gibbard said: 'The FCA has got to make sure the market is stabilised – this is the second biggest credit market outside of mortgages.
'This is more than provision of credit – this is people getting to work, taking somebody to hospital, taking the kids to the playground – so this is a real facilitator for the economy.
'I think there is a risk, but everybody is so acutely aware of that risk so hopefully it won't have that disruptive effect.'
Mr Gibbard also said a decision could have 'far-reaching consequences' with other parts of the financial services sector also potentially coming under pressure for commission payments on loans.
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Times
4 hours ago
- Times
How drivers were sold a car finance compensation fantasy
Britain has narrowly avoided a costly car finance compensation free-for-all after a landmark court ruling derailed chances of a payout for millions of drivers. Claims lawyers had been bombarding consumers with adverts suggesting they may have been entitled to thousands of pounds in a scandal over hidden commission on car finance deals. The scandal had been expected to rival the mis-selling of payment protection insurance, which cost banks more than £38 billion. It was thought that nearly 15 million drivers could be entitled to payouts worth as much as £44 billion in total — although Friday's Supreme Court ruling means the numbers are set to be far smaller. Questions have now been raised over whether those using car finance really lost out and how many of them deserve compensation at all. The chancellor, Rachel Reeves, had tried to intervene ahead of the ruling — arguing that a colossal compensation bill for the industry would damage the economy and consumers. The Supreme Court ruled on three cases where consumers bought cars on finance and argued that they had been treated unfairly because they had not been told about commission involved in their deals — which ranged from £183 to £1,651. The court rejected two of the three cases, but upheld a complaint by Marcus Johnson, a factory worker from south Wales — because in his case the £1,651 commission in his loan was 55 per cent of the fee (including interest) on his loan over five years. 'The fact that the undisclosed commission was so high is a powerful indication that the relationship between Mr Johnson and the lender was unfair,' the court's judgment said. It leaves the door open to claims for compensation on deals that contained large amounts of commission, or where the commission model influenced what they paid. How much would be needed for a deal to be unfair is something that is likely to be decided by the City regulator, the Financial Conduct Authority (FCA), which said it would confirm if it would introduce a redress scheme before stock markets open on Monday morning. The FCA had been investigating finance deals that had used a model called discretionary commission, which incentivised dealers to give customers a worse interest rate on their loan. However, a judgment by the Court of Appeal last October opened the door to compensation claims by millions of motorists who had bought cars on finance, regardless of the commission model. Lenders appealed to the Supreme Court over the ruling. About nine in ten cars are bought on finance and £39.7 billion was borrowed on more than two million cars in the year to May, according to the Finance and Leasing Association, a trade body. The Court of Appeal had ruled in October that car dealers had a duty to make clear the nature and value of any commission paid to them to ensure that borrowers could give 'informed consent' before agreeing to a deal. Reeves was among those concerned about a claims free-for-all, with the Treasury reportedly drawing up contingency plans to shield lenders from having to pay out billions of pounds in compensation. The Treasury attempted to intervene in the Supreme Court case, arguing that a ruling had 'the potential to adversely affect the United Kingdom's reputation as a place to do business, with a consequent impact on economic growth'. In the meantime complaints about car loans to the Financial Ombudsman Service (FOS), a body that solves disputes, have risen from 4,130 in the first three months of 2023-24 to 37,230 in the last three months of 2024-25. 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Glasgow Times
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Drivers should be ‘very pessimistic' over car finance claims, say lawyers
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BBC News
10 hours ago
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Car finance judgement 'a hard pill to swallow'
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