Lenders do not owe millions compensation over car finance, Supreme Court rules
The decision comes 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 the motorist's fully informed consent, were unlawful.
The ruling in October last year found that three motorists, who all 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.
On Friday, Lords Reed, Hodge, Lloyd-Jones, Briggs and Hamblen ruled that car dealers did not have a relationship with their customers that would require them to act only in the customers' interest, and that the Court of Appeal was wrong.
But they said that some customers could still receive payouts by bringing claims under the Consumer Credit Act (CCA).
The Financial Conduct Authority (FCA) said it will confirm by Monday whether it will consult on a redress scheme, while one of the three drivers said he was 'dumbfounded' by the ruling.
Handing down the judgment, Lord Reed said the car dealer 'was at all times pursuing its own commercial interest in achieving a sale of the car on profitable terms'.
He continued: 'In reaching the opposite conclusion, the Court of Appeal failed to understand that the dealer has a commercial interest in the arrangement between the customer and the finance company.
'The court mistakenly treated the dealer as acting solely in the interests of the customer once the customer had chosen a car and agreed a price.'
The FCA, which intervened in the case, previously said it would set out within six weeks whether it would consult on a redress scheme.
But a spokesperson said after the ruling that it would confirm whether it will consult on any such scheme by 8am on Monday 'to provide clarity as quickly as possible'.
Lord Reed said the Supreme Court had decided to deliver its ruling on a Friday afternoon, outside of trading hours and after the markets had closed for the weekend, to avoid the risk of 'market disorder'.
The three drivers involved in the case, Marcus Johnson, Andrew Wrench and Amy Hopcraft, all used car dealers as brokers for car finance arrangements for second-hand cars worth less than £10,000 before January 2021.
Only one finance option was presented to the motorists in each case, the car dealers made a profit from the sale of the car and received 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, and the three drivers took legal action individually between 2022 and 2023.
After the claims reached the Court of Appeal, three senior judges ruled the lenders were liable to repay the motorists the commission because of the lack of disclosure about the payments.
Lawyers for the lenders told the Supreme Court at a three-day hearing in April that the decision was an 'egregious error', while the FCA claimed the ruling went 'too far'.
In their 110-page judgment, the five Supreme Court justices found that 'an offer to find the best deal is not the same as an offer to act altruistically'.
They said: 'No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car.'
However, the judges upheld a claim brought by Mr Johnson under the CCA that his relationship with the finance company had been 'unfair'.
Mr Johnson, then a factory supervisor, was buying his first car in 2017 and paid the £1,650.95 in commission as part of his finance agreement with FirstRand for the Suzuki he purchased.
The Supreme Court ruled he should receive the commission and interest, which Mr Johnson told the PA news agency totalled 'just over £3,000'.
Mr Johnson said that he was 'dumbfounded' by the ruling, which he said 'does not sit right with me'.
He said: 'I am obviously happy that my case was successful, but for so many other people that were also overcharged, I just don't like the message it sends to the UK consumer.'
He said the ruling 'sounds like it's fine to secretly overcharge customers for commission'.
A Treasury spokesperson said it would work to 'understand the impact for both firms and consumers'.
They said: '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.'
Close Brothers said it was 'considering' the judgment and 'will make any further announcements as and when appropriate'.
Kavon Hussain, founder and lawyer at Consumer Rights Solicitors, which represented Ms Hopcraft and Mr Wrench, said it was 'disappointing' the Supreme Court did not fully uphold the Court of Appeal's ruling.
He said: 'The Supreme Court ruling supports our view that lenders had acted unfairly in millions of car finance deals.
'This should now pave the way for the biggest compensation payout to motorists in British legal history.
'We will fight to get consumers the money they are owed by these lenders.'
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Can I still get car finance compensation?
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The FCA began an investigation into historic car finance lending in January 2024, prompted by a rising number of complaints to the courts and to the Financial Ombudsman Service, a free dispute service, about hidden commissions in car finance deals. In particular the FCA was looking at discretionary commission arrangements, where the fee paid to dealers was linked to the interest rate borrowers paid, which in some cases incentivised dealers to give customers a higher rate. This model was used in about 35 per cent of car finance deals, according to the FCA, before it banned the practice in January 2021. The FCA said borrowers could have paid about £1,100 more in interest over a four-year £10,000 car finance deal under the commission model. The regulator was looking at whether consumers were fully told about how to commission worked and the impact it could have on their repayments. 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Stephen Haddrill, director general of the Finance & Leasing Association, told Radio 4's Today programme that while it 'makes sense' to have a compensation schem, there rae 'major concerns' about the time limit. Haddrill argued: I just think it's completely impractical. It's not simply firms that don't have the details about contracts back then, customers don't either.
