Millions of motorists will not be able to claim compensation for hidden commissions paid on car loans following a Supreme Court ruling.
The UK’s highest court sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other lenders to car dealers.
The decision reversed earlier court rulings that had opened the possibility of widespread compensation claims from motorists on a similar scale to the PPI mis-selling scandal.
But many drivers who took out a certain type of finance deal could still be in line for payouts. The UK’s financial regulator, who is considering a compensation scheme, said it would “take time to digest the judgement”.
The Supreme Court heard three cases in the joint appeal, brought by two lenders FirstRand bank and Close Brothers.
The lenders were challenging a Court of Appeal ruling which found that it was unlawful for car dealers to receive hidden commission from lenders when they sign customers up for motor finance before 2021.
That ruling put millions of motorists in line for compensation depending on how their car loan interest rate was set, and exposed lenders to potentially billions of pounds worth of payouts.
Delivering the court’s decision, Lord Reed said the motorists had argued that the dealers had a fiduciary duty – an obligation to put the customer’s needs above their own – but the court disagreed.
“At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller,” Lord Reed said.
The court ruled against the lender in one case.
It said, in the case of Marcus Johnson, that the commission paid to the dealer was so significant – 55% of the total charge or credit including interest and fees – that it was a “powerful indication” the relationship between Mr Johnson and lender FirstRand was unfair.
The Supreme Court awarded Mr Johnson the amount of a commission plus interest.
Speaking after the decision, Mr Johnson said he was “pleased for myself, but not for the hundreds of others” who will miss out.
“It’s weird,” he said. “It’s a win, but it’s a really big bag of salt to go with it.”
About two million new and used cars are bought each year under motor finance, according to the FCA, or roughly nine in 10.
While the scope of compensation claims to be made on an industry-wide level has been narrowed, there are still many who could receive payouts.
About four in 10 cars sold before 2021 were sold through a now-banned method called discretionary commission arrangements.
The UK’s financial watchdog, the Financial Conduct Authority (FCA), had been investigating complaints from motorists about these arrangements.
Under these deals, car dealers were paid more in commission if they clinched a higher interest rate on the loan. The practice has been banned since 2021.
Following the Supreme Court’s decision, Richard Barnwell, a partner at advisory firm BDO, said some of those affected by discretionary commission arrangements could qualify for redress.
“If discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from/to £5-£13 billion or more,” Mr Barnwell said.
Martin Lewis, founder of Money Saving Expert, said he believed compensation payments could total £10bn and that he would be “gobsmacked” if there was not a scheme for DCA payments.
“I would very much expect to see the regulator, the FCA, have a consultation for Discretionary Commission Arrangements, and possibly mentioning in there this new category, the one upheld by the Supreme Court, about excessive commission arrangements,” he added.
The FCA has said it will confirm “whether we will consult on a redress scheme before markets open on Monday 4 August”.
“We want to bring greater certainty for consumers, firms and investors as quickly as possible,” it added.
Alex Neill, co-founder of consumer rights group Consumer Voice said it was a “disappointing” ruling but welcomed the fact the court had “made it clear where consumers deserve redress”.
“The financial regulator must now urgently act to introduce a redress scheme that ensures drivers get back what they’re owed,” he said.
But the director general of the Finance and Leasing Association, Stephen Haddrill, said the judgement was “an excellent outcome” that “restored certainty and clarity” to the car market.
A Treasury spokesperson said the government “respected the judgement” and it would “work with regulators and industry to work out the impact for businesses and customers”.