01-08-2025
Consumers denied car finance payouts by Supreme Court
Millions of consumers who might have been in line for compensation payouts over motor finance will miss out after a landmark ruling from Britain's highest court that curbs a multibillion-pound crisis facing the car loan industry.
Analysts had warned that lenders could face a redress bill of as much as £44 billion, akin to the £50 billion payment protection insurance (PPI) debacle, after the Court of Appeal last autumn found in favour of consumers in three key cases brought against car loan providers MotoNovo and Close Brothers.
However, the Supreme Court on Friday overturned key elements of the earlier judgment in a partial victory for lenders. Its decision limits the scale of the scandal but does not mean lenders have avoided potentially paying redress to millions of consumers.
• 23m people expecting compensation for car finance scandal
This is because the Financial Conduct Authority, the City regulator, is conducting a separate review into part of the motor finance market covering at least 14.6 million deals. It has previously signalled it is likely to impose a redress scheme on the industry but has been waiting for the Supreme Court's ruling before making a final decision. The FCA will confirm its next steps within six weeks of Friday's ruling. The Supreme Court also upheld one of the cases it considered that centred around partial commissions.
The scandal revolves around potentially unfair, 'secret' commissions that were paid by lenders to car dealers for arranging finance used by consumers to buy cars.
The FCA stunned the motor finance industry in January last year when it announced it would examine so-called discretionary commissions paid to dealers between April 2007 and January 2021, which was when these types of payment were banned by the regulator because they created conflicts of interest.
Under discretionary arrangements, car dealers were able to set the interest rate on the finance provided to borrowers. The higher the rate, the bigger the commission, creating an incentive for dealers to push up a customer's borrowing costs.
Data collected by the FCA covering about 90 per cent of the market suggests there were about 25.9 million motor finance agreements between 2007 and the end of 2020, of which 14.6 million involved discretionary commissions totalling £8.1 billion. Since the FCA's ban was announced, motor finance firms have faced a rising tide of complaints from borrowers who have alleged these commissions were not disclosed to them and that their finance deal was unfair.
The wide-ranging nature of the authority's inquiry immediately spurred speculation that the motor finance industry would be on the hook to pay out billions in compensation to millions of consumers. A whole industry of claims management companies and law firms seeking to profit from the scandal has also rapidly developed.
However, the controversy then escalated in October when the Court of Appeal ruled against MotoNovo and Close in cases brought by consumers.
In a judgment that shocked the industry, the court ruled that car dealers, in their capacity as credit brokers, owed a fiduciary duty to their customers, meaning they should act in consumers' best interests. It also concluded that all types of commission, not just discretionary arrangements, were unlawful if the payment was not disclosed to the borrower or had their consent and that the lenders were liable to repay the commission.
This significantly increased the potential compensation bill facing the motor finance industry and raised the prospect that other areas where commissions and brokers are involved, such as energy, might be caught by the ruling.
Close and MotoNovo appealed against the ruling in the Supreme Court, which heard the case in April.
The government, which is concerned about lenders being flooded by compensation demands and had unsuccessfully sought to intervene in the case, signalled a week ago it could change the law to effectively override an adverse ruling for the motor finance industry.
