Millions are set to miss out on car finance compensation after the Supreme Court ruled lenders are not liable for hidden commission payments in car finance schemes.
The Court of Appeal ruled in October last year, 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 ruling found 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.
Two lenders, FirstRand Bank and Close Brothers, took the row to the Supreme Court, arguing that the decision was an “egregious error”.
The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, opposed the challenge.
But only one will get compensation after judges found his deal was unfair, while most claims were rejected. The Independent explains all you need to know.
What did the Supreme Court rule?
The Supreme Court ruled on Friday (1 August) that lenders are not liable for hidden commission payments in car finance schemes - meaning millions of drivers hoping for payouts over hidden car finance commissions have missed out.
It comes after the Court of Appeal ruled in October last year that commission payments to car dealers as part of finance arrangements made before 2021 without the motorist’s fully informed consent were unlawful.
Delivering the Supreme Court's ruling, Lord Reed said: “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.”
Why did the case make it to the Supreme Court?
Mr Johnson, Mr Wrench and Ms Hopcraft all used car dealers as brokers for car 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 car 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.
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.
Mr Wrench, described by the Court of Appeal as a “postman with a penchant for fast cars”, entered into two hire-purchase agreements for an Audi TT coupe and a BMW 3 Series, with FirstRand, in 2015 and 2017, respectively, paying hundreds in commission in total.
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 the Suzuki he purchased.
After the claims reached the Court of Appeal, three senior judges ruled the lenders were liable to repay the motorists the commission due to the lack of disclosure about the payments.
In a letter to the Supreme Court in December last year, the FCA said almost 99 per cent of the roughly 32 million car finance agreements entered into since 2007 involved a commission payment to a broker.
How will the Supreme Court’s decision impact motorists?
The UK’s highest court has sided with the finance companies and motorists will now struggle to claim compensation.
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).
DCAs were the most common commission arrangement before they were outlawed. Between 2007 and 2020, about three-quarters of all agreements had a DCA, according to the regulator.
What happens now?
Martin Lewis has urged drivers not to rush to make claims or sign up to claims firms after the ruling.
Posting on X, Mr Lewis wrote: “CAR FINANCE DO NOT DO ANYTHING NOW. DO NOT SIGN UP TO A CLAIMS FIRM. PLEASE SHARE.”
He added: “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 ,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.”
How has the government responded?
The Treasury has said it will work with the industry and regulators following Friday’s Supreme Court ruling.
A 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.”
Lib Dem MP and Treasury Committee member Bobby Dean said he hopes consumers are able to “get the protection they deserve” following the ruling from the Supreme Court on car finance.
Speaking outside the courtroom, he said: “I think this is a good day for the consumer. What’s been proven to industry is that you must be honest in your arrangements and you cannot hide the commission you’re going to be receiving in any contract or arrangement.
“Hopefully consumers now get the protection they deserve.”
Speaking of the Supreme Court justices’ ruling, he continued: “The consumers were treated unfairly and they particularly focused on the fact that you must disclose your commission arrangements.
“Now it’s incumbent on the regulator to make sure that the compensation scheme is widely recognised and it’s not lender-led, and people are able to come forward and make the claims on any compensation they might be due.”
