Car Finance Compensation Crisis Averted By Supreme Court Ruling

The UK’s car finance sector has been spared a financial earthquake after a Supreme Court judgment reduced the potential compensation bill facing lenders and dealers. The decision on a long-running dispute over discretionary commission payments brings clarity to consumers, finance firms and car dealers, following more than eighteen months of uncertainty and speculation over possible PPI-scale redress liabilities.

The crux of the matter was the use of discretionary commissions, where car dealers set the interest rate on finance agreements and received higher payments for charging customers more. This practice, which persisted until a regulatory ban in January 2021, created obvious conflicts of interest and led to a surge of customer complaints and county court claims.

The Financial Conduct Authority had already estimated its ban would save borrowers a collective £165 million a year. When the ombudsman found against major lenders over undisclosed commissions, fear swept through the industry, causing some firms to put aside hundreds of millions to cover prospective payouts. Lloyds Banking Group, Santander UK and Close Brothers were among those that substantially increased their provisions as a result.

Last autumn’s Court of Appeal decision rattled the industry even further by finding that any commission not properly disclosed could be deemed unlawful, that dealers owed a fiduciary duty to borrowers, and that lenders could be held liable for compensation. Suggestions surfaced that providers could be on the hook for up to £44 billion – a prospect not lost on the Treasury or the financial markets.

The Supreme Court, however, has now rejected the notion that car dealers owe a fiduciary duty to customers or that commission payments amount to bribes. The judgment lifts the main threat of massive compensation, though some liability remains in specific cases, and the FCA is expected to confirm details of any redress scheme for historic discretionary commission arrangements soon.

About nine in ten new cars in the UK are financed, making this a critical issue for industry and consumers alike. Whilst the Court’s judgment is viewed as a sensible commercial outcome, the history of mis-selling and lack of transparency in the sector means that scrutiny from regulators and consumers will continue. Lenders, meanwhile, can now focus on rebuilding public trust and delivering fairer, clearer finance products.