Millions of drivers have missed out on compensation after the Supreme Court delivered its ruling on claims of mass mis-selling of car finance deals.
Justices at Britain’s top court delivered their ruling - unusually - on Friday afternoon to avoid destabilising the financial market, in a dispute that could have led to compensation worth billions of pounds.
In October last year, the Court of Appeal ruled that “secret” commission payments to car dealers as part of finance arrangements made before 2021 without the motorist’s fully informed consent were unlawful.
The case was brought by three motorists, Marcus Johnson, Andrew Wrench and Amy Hopcraft, who all bought their cars for less than £10,000 before 2021.
They had all not been 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, and should receive compensation.
Two lenders, FirstRand Bank and Close Brothers, challenge the Court of Appeal ruling, while the Financial Conduct Authority (FCA) stepped in to suggest judges had gone “too far”.
At the Supreme Court, Lords Reed, Hodge, Lloyd-Jones, Briggs and Hamblen ruled that the Court of Appeal had made a series of blunders when reaching its decision.
Cases brought by Mr Wrench and Ms Hopcraft were dismissed, while the judges ruled in favour of Mr Johnson due to the “unfair” way his car finance deal had been presented.
Experts in the car industry and lending sector are now picking over the ruling, to determine how widespread the compensation payments may be.
The Financial Conduct Authority (FCA) has already banned deals in which the dealer received a commission from the lender based on the interest rate charged to the customer - discretionary commission arrangements (DCAs) - which were seen as incentivising increasing the customer’s interest rates.
Lord Reed said the FCA had warned that the outcome of the appeal “may affect the price of securities issued by companies involved in the car finance market, and the market will need time to digest the judgment and consider its implications.
“If (the ruling) was issued during trading hours, there would be a risk of market disorder.”
The court heard 99 per cent of the roughly 32 million car finance agreements entered into since 2007 involved a commission payment to a broker.
In each of the test cases, the buyers were only offered one finance option, with the car dealers making a profit from the sale of the car and commission from the lender.
The Court of Appeal found that “burying” a statement about the nature of the deal in the small print “which the lender knows the borrower is highly unlikely to read will not suffice”.
But the Supreme Court dismissed a suggest that the commission amounted to a “bribe”, rendering the deals unlawful, and it said the Court of Appeal judges had fundamentally misunderstood the role of a car dealer.
“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 Court of Appeal also attached significant weight to findings that the customers trusted the dealers and were in a somewhat vulnerable position. That was the wrong approach.
“A fiduciary duty of loyalty is not generated by feelings of trust, or by vulnerability. It is not a form of consumer protection.
“It is generated by an undertaking to act entirely in another person’s interests without regard to one’s own. That was obviously not the position of the dealers, interested as they were throughout in achieving sales.”
The FCA has already said it will decide within six weeks how to deal with compensation claims that may flow from the ruling.
The government tried and failed to intervene in the Supreme Court battle, after saying it was worried about the knock-on impact of compensation payments.
Following the ruling, a Treasury spokesperson 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.”
