Millions denied payouts as Supreme Court rules in favour of lenders over car finance deals
A landmark Supreme Court ruling has delivered a blow to motorists after it sided with major lenders in the £44billion car finance scandal dubbed ‘PPI on wheels’.
Millions of car owners had been hoping for a payout over claims they were ‘mis-sold’ finance deals dating back more than a decade.
But hopes of compensation were dashed after the most senior judges in the country ruled lenders are not liable for hidden commission payments in car finance schemes.
The ruling is a relief for some of the nation’s biggest lenders including Lloyds, Close Brothers and Santander, who could have been forced to hand over £44billion in compensation.
All eyes are now on the Financial Conduct Authority (FCA), as some drivers could still receive payouts.
An FCA spokesperson said: ‘It will take time to digest the judgment. We want to bring greater certainty for consumers, firms and investors as quickly as possible.
‘We will be working through the weekend to analyse the judgment and determine our next steps.’
The watchdog said it will confirm whether it will consult on a redress scheme before markets open on Monday.
A landmark Supreme Court ruling has delivered a blow to motorists after it sided with major lenders in the £44billion car finance scandal
Members of the media report from outside the Supreme Court in London, where lenders have avoided potentially having to pay compensation to millions of drivers after the court ruled that they are not liable for hidden commission payments in car finance schemes
Many brokers and dealers were paid behind-the-scenes commission by lenders to sign buyers up to car finance deals, a practice deemed ‘unlawful’ by the Court of Appeal in October last year – a decision that was successfully appealed by lenders at the Supreme Court
Many brokers and dealers were paid behind-the-scenes commission by lenders to sign buyers up to car finance deals. This was deemed ‘unlawful’ by the Court of Appeal in October last year.
But the case was appealed and landed in the Supreme Court, which yesterday delivered its judgement at 4.35pm after the stock market closed.
Supreme Court President Lord Reed said the court allowed the appeals brought by the finance companies.
It did uphold one claim that a customer’s relationship with the finance company was ‘unfair’ and that claimant will be awarded the amount of commission plus interest.
However, he added that ‘other customers’ claims are rejected’.
Most new cars are bought via personal contract purchase car finance deals. Drivers pay an upfront deposit for their car, then borrow to cover the cost over a set period, often 36 or 48 months, and decide whether to make a payment at the end to buy the car outright, or hand it back.
The advantage for motorists is they can get a new car with a small deposit – or sometimes no money down – and benefit from lower monthly payments, as they are effectively only covering the depreciation over the term of the finance agreement.
Each year, this helps dealers sell about two million cars. However, many dealers and brokers were paid a commission by car finance lenders for signing motorists up to agreements.
Senior judges in the country ruled lenders are not liable for hidden commission payments in car finance schemes
In some cases, brokers secured higher interest rates on the loans in return for higher commission, which in turn meant higher payments for motorists.
Last October, the Court of Appeal ruled that ‘secret’ commission payments, as part of finance arrangements made before 2021 without the motorist’s fully informed consent, were unlawful.
The lenders, FirstRand Bank and Close Brothers, challenged that decision.
However, lenders may still need to pay out compensation to drivers who had unknowingly signed up to a discretionary commission agreement (DCA) when they took out their car loans.
This is where brokers and dealers hike interest rates on car finance to increase their commission.
A car buyer borrowing £10,000 over four years could have paid up to £1,100 more than they should have because of commission payments made to dealerships by the banks, according to the FCA.
Motorists may have paid £165million a year in unnecessary fees. These were banned in 2021 by the regulator.
The FCA has been probing these DCA agreements since January 2024. In March, the watchdog said if after the Supreme Court ruling it thinks there was widespread harm to consumers from commission payments, then it could set up an industry-wide redress scheme.
A car buyer borrowing £10,000 over four years could have paid up to £1,100 more than they should have because of commission payments made to dealerships by the banks, according to the Financial Conduct Authority
This means drivers won’t have to go to court, or use a law firm or claims management company, to get the compensation they are owed.
Greg Huitson-Little, partner at Menzies LLP, says: ‘Car purchases and car financing are understandably intrinsically linked when buying new or second-hand cars.
‘But terms like ‘dealer contributions,’ ‘rentals,’ and ‘guaranteed future values’ have all blurred the lines between the purchase of a car and the arranging of finance, making it very difficult for consumers to understand the true nature of the two transactions.
‘This lack of transparency – brought into sharp focus with hidden commissions – has steadily eroded consumer trust, which will likely have long term implications for motor finance and wider consumer credit sectors.
‘Although the Supreme Court’s decision reverses much of the Court of Appeal’s earlier decisions, the reputational damage is already done.’
Website Money Saving Expert said more than 3.1million people have submitted complaints about car finance commissions using their free tool.
Consumer campaigner and site founder, Martin Lewis CBE, 53, advised drivers not to rush into signing up with a claims firm in the wake of the Supreme Court’s decision.
‘CAR FINANCE DO NOT DO ANYTHING NOW. DO NOT SIGN UP TO A CLAIMS FIRM. PLEASE SHARE,’ he said in a post on social media platform X.
‘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.’
Consumer campaigner and Money Saving Expert founder, Martin Lewis CBE, advised drivers not to rush into signing up with a claims firm in the wake of the Supreme Court’s decision
Martin Lewis said the Financial Conduct Authority may still introduce a ‘redress scheme’ for some customers sold to in this way
What car finance deals were made?
The majority of new cars – as many as 90 per cent – are bought via car finance deals, which is where drivers can simply pay an upfront deposit for their car, borrow the rest from a lender and pay back the loan each month.
Each year some two million new and used cars are purchased this way.
However, many dealers and brokers were paid a commission by car finance lenders for signing motorists up to these agreements.
In some cases, brokers secured higher interest rates on the loans in return for higher commission, which in turn meant higher payments for motorists.
Last October, the Court of Appeal ruled that ‘secret’ commission payments, as part of finance arrangements made before 2021 without the motorist’s fully informed consent, were unlawful.
It looked at the cases of three claimants, who had each bought cars on credit.
In each case, the car dealer made a profit on the sale of the car but also received a commission from the lender for introducing the business to them – which the three claimants argued they did not know about.
However, the industry maintains it has done nothing wrong.
Postman Andrew Wrench (pictured) was one of three claimants involved in the Supreme Court ruling. Last year the Court of Appeal ruled that ‘secret’ commission payments, as part of finance arrangements made before 2021 without the motorist’s fully informed consent, were unlawful – a decision challenged by the lending companies
Another of the claimants, Marcus Johnson (pictured) bought a Suzuki Swift from a dealer who received more than £1,600 in commission after he took out a finance deal
The lenders, FirstRand Bank and Close Brothers, challenged that Court of Appeal decision, which is why the case went to the Supreme Court.
Lawyers for the lenders told the Supreme Court at a three-day hearing in April the decision was an ‘egregious error’, while the Financial Conduct Authority intervened in the case and claimed the ruling ‘goes too far’.
The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, opposed the challenge.
Giving a summary of the Supreme Court’s ruling on Friday, Lord Reed, one of five justices who heard the case, said they had allowed the lenders’ appeals.
He said: ‘Each party to the three-cornered arrangement – the customer, the dealer and the finance company – was engaged at arm’s length from the other participants in the pursuit of their own objectives.’
However, the judges upheld a claim brought by Mr Johnson under the Consumer Credit Act (CCA) 1974 that his relationship with the finance company had been ‘unfair’, awarding him the commission amount of £1,650.95 plus interest.
In their full 110-page judgment, Lords Reed, Hodge, Lloyd-Jones, Briggs and Hamblen said that car dealers did not have a relationship with their customers that would require them to act only in the customers’ interest.
They said: ‘An offer to find the best deal is not the same as an offer to act altruistically.’
The Financial Conduct Authority claims the Court of Appeal ruling in October last year ‘goes too far’, adding that car dealers do not owe ‘fiduciary duties’ to buyers to act in their best interests
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.’
In a statement, Close Brothers said: ‘Close Brothers is considering the Supreme Court’s judgment and will make any further announcements as and when appropriate.’
In a letter to the Supreme Court in December last year, the FCA said almost 99% 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 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 the £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.
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’.
But in Friday’s Supreme Court judgment, the five justices said: ‘No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car.’
They continued: ‘We conclude that, to the extent that the Court of Appeal’s judgment and the respondents’ case depends upon the recognition of a fiduciary obligation of undivided loyalty on the part of the dealer when selecting and negotiating a finance package for the customer, they are wrong.’
FCA to look into redress scheme
The ruling comes as a major relief to car finance lenders as they have now narrowly avoided stumping up potentially billions of pounds.
But they still my need to pay out compensation to drivers who had unknowingly signed up to a discretionary commission agreement (DCA) when they took out their car loans.
In a DCA, lenders allow brokers and dealers to hike interest rates on car finance to increase their commission.
A car buyer borrowing £10,000 over four years could have paid up to £1,100 more than they should have because of commission payments made to dealerships by the banks, according to the Financial Conduct Authority (FCA).
Motorists may have paid £165million a year in unnecessary fees, it is believed.
These were banned in 2021 by the regulator.
While the Supreme Court looked at all hidden commission cases – including these discretionary cases and also fixed percentage – the FCA is still set to announce its decision on a redress scheme next month.
The FCA, which has been probing these DCA agreements since January 2024, is holding off confirming a compensation scheme and setting out any details until six weeks after today’s court ruling.
The watchdog in March said if after the Supreme Court ruling it thinks there was widespread harm to consumers as a result of commission payments, then it could set up an industry-wide redress scheme.
This means that drivers won’t have to go to court, or use a law firm or claims management company, to get the compensation they are owed.
We won’t know the scope of the redress scheme until the FCA reveals its plans in six weeks’ time – it is likely to still cost lenders billions, but nowhere near as much as first estimated.
Greg Huitson-Little, partner at Menzies LLP, says: ‘Car purchases and car financing are understandably intrinsically linked when buying new or second-hand cars.
‘But terms like ‘dealer contributions,’ ‘rentals,’ and ‘guaranteed future values’ have all blurred the lines between the purchase of a car and the arranging of finance, making it very difficult for consumers to understand the true nature of the two transactions.
‘This lack of transparency – brought into sharp focus with hidden commissions – has steadily eroded consumer trust, which will likely have long term implications for motor finance and wider consumer credit sectors.
‘Although the Supreme Court’s decision reverses much of the Court of Appeal’s earlier decisions, the reputational damage is already done.
While we await the FCA’s guidance on redress later this year, the message is clear: the car finance industry needs to be more transparent.
‘That means clear terms and simple structures, proper disclosure, and a renewed commitment to treating car finance for what it is – a loan between the consumer and a third-party lender. The days of opaque ‘deals’ must come to an end.’
