Car finance mis-selling scandal: Millions of drivers denied payouts after Supreme Court ruling – UK Times

Millions of drivers have been denied payouts as the Supreme Court ruled that lenders are not liable for hidden commission payments in car finance schemes.

Two lenders, FirstRand Bank and Close Brothers, went to the UK’s highest court to challenge a Court of Appeal ruling that found that the “secret” commission payments paid by buyers to car dealers as part of finance arrangements made before 2021, without the motorist’s fully informed consent, were unlawful.

The Supreme Court’s decision means that the bulk of the claims will not go ahead, leaving the door open to compensation for only the most serious cases and protecting banks from a wave of costly payouts.

Experts now expect compensation to cost lenders between £5bn and £15bn, rather than the £45bn it was expected to cost if the Supreme Court upheld the ruling in full – a payout that would have been similar in scale to the one that followed the payment protection insurance (PPI) scandal, which cost the banks almost £50bn.

The ruling means the Treasury has avoided a worst-case scenario, as such a massive payout from banks would have posed a major threat to the government’s plans to grow the economy. There was also speculation that the chancellor might have been forced to step in to cap the amount of compensation banks would be required to pay, in order to limit its impact.

In the wake of the ruling, lawyers have said consumers who paid large commissions can still expect compensation.

Richard Coates, partner and head of automotive at the law firm Freeths, said: “This is a significant judgment for lenders and dealers.

“As we predicted, whilst the Supreme Court found that dealers do not owe a fiduciary duty of trust and confidence when arranging car finance for their customers, the judgment opens the gateway for consumers to bring claims under the Consumer Credit Act, where particularly large commissions have been paid and the relationship is therefore unfair.

“It is anticipated that the FCA [Financial Conduct Authority] will bring redress for those cases where it is deemed that the relationship is unfair, and we expect to learn more from the FCA about this redress scheme within the next six weeks.”

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.

But lawyers for the lenders told the Supreme Court at a three-day hearing in April that the decision was an “egregious error”. Intervening in the case, the FCA claimed that the ruling “goes too far”.

The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, opposed the challenge.

Friday’s ruling saw judges reject claims that the payments amounted to “bribes”, as well as rejecting the argument that salesmen had a “fiduciary duty” to look out for customers. However, it fell short of being a full victory for the lenders, as the Supreme Court upheld the finding that in one of the three cases, the failure of the finance company to disclose the arrangement to the customer was unfair.

Bobby Dean MP – a member of Treasury Committee – welcomed the ruling, saying: “Today is a good day for the consumer and a lesson to industry that honesty matters. If you strike car loans on behalf of consumers, you must be totally upfront about the commission you receive.

“The scale of the rip-off is truly shocking, [with] some people overpaying interest by thousands of pounds. It is now on the government and the regulator to ensure that people get the compensation they are owed.”

The Treasury said it would now “work with regulators and industry to understand the impact for both firms and consumers”.

Giving a summary of the long-awaited Supreme Court ruling on Friday, Lord Reed, one of five justices who heard the case, said: “For the reasons set out in detail in a judgment published today, the Supreme Court allows the appeals brought by the finance companies.”

In the wake of the ruling, money-saving expert Martin Lewis urged drivers not to rush to make claims or to sign up to companies offering this service, saying: “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, [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.”

He added: “My assumption/guess is this will mean car finance refunds will be in the £5bn to £15bn range now rather than the up to £45bn if the Supreme Court had upheld all of it.”

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.

Mr Johnson, Mr Wrench and Ms Hopcraft all used car dealers as brokers for car finance arrangements for secondhand cars, all worth less than £10,000, before January 2021. Only one finance option was presented to the motorist 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, and the three drivers took legal action individually between 2022 and 2023.

After the claims reached the Court of Appeal, three senior judges ruled that the lenders were liable to repay the motorists the commission because they had failed to disclose the arrangement.

Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said last year that while each case was different, “burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice”.

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.”