Millions of drivers will miss out on compensation after the supreme court spared lenders a potential £44bn bill for hidden commission payments in car finance contracts.
In a blow to consumers, the UK’s highest court sided with finance companies in a challenge to last October’s shock ruling by the appeal court that found commission payments paid by buyers to car dealers were unlawful.
In their ruling on Friday, a panel of justices led by the supreme court president, Lord Reed, upheld only one consumer’s case, originally filed by a borrower named Marcus Johnson. Cases brought by two others – alleging that commissions paid to car dealers were bribes and that dealers owed a duty of loyalty to the customer – were rejected.
Johnson told the Guardian: “Even though I won, I just feel like it’s a dark day for the UK consumer … I was just hoping it could have helped others claim back what they should not have been charged, in my opinion.”
However, the door is still open to a more limited compensation scheme being considered by the Financial Conduct Authority.
The FCA said on Friday that it would confirm whether or not it would press ahead with a compensation scheme before the stock markets opened on Monday morning. It said: “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.
“Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well, given around 2 million people rely on it every year to buy a car.”
The MoneySavingExpert.com founder, Martin Lewis, urged consumers to “do nothing” while the FCA determines the scope of a potential compensation scheme. He also warned that signing up with a claims management firm could mean borrowers lose up to 30% of any payout.
Lewis said that his best guess was that lenders could end up shelling out £5bn-£15bn worth of compensation and that the number of borrowers likely to receive it would be in the “single-digit millions”.
That would probably mean that most payouts would be in the high hundreds, rather than thousands, of pounds, he said.
But Lewis said he did not believe the ruling was as negative for consumers as some people thought, given that a larger compensation bill could have pushed some firms into failure. “If those firms went bust, no one would get any compensation,” he said.
It could also have resulted in fewer loans being available for consumers, including those who rely on credit. “So there was certainly potential consumer detriment, societal detriment, if the supreme court had upheld the full decision as well. So I think, certainly the chancellor will be pleased tonight.”
The supreme court case was launched by two specialist lenders, Close Brothers and South Africa’s FirstRand, in an attempt to challenge the three consumers who collectively won the court of appeal case in October. Justices were asked to review the court of appeal ruling, which suggested nearly all commission arrangements – unless plainly disclosed and issued under full consent of the consumer – were unlawful.
Lenders were concerned that the ruling went far beyond regulations set by the FCA, and vastly expanded a scandal that had previously focused on DCAs (discretionary commission arrangements), which were banned in 2021.
If upheld, it would also have meant millions of people and nearly anyone who bought a car with finance could be owed compensation. In the UK, about 80-90% of new cars, and a growing number of used vehicles, are bought with the help of loans.
Analysts had estimated that the appeal court ruling could collectively cost lenders – including Santander UK, Close Brothers, Barclays and Lloyds – up to £44bn. That would have nearly rivalled the payment protection insurance (PPI) saga, which cost banks £50bn.
The potential bill for industry had caused concern among Labour ministers. The chancellor, Rachel Reeves, tried to intervene in January before the supreme court’s April hearing, urging judges to avoid handing “windfall” compensation to borrowers.
The Guardian revealed last week that Reeves was considering overruling the supreme court’s decision with retrospective legislation, in order to help save lenders billions of pounds, in the event that it ruled in favour of consumers.
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Responding to the decision on Friday, a spokesperson for the Treasury 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.”
The Financing & Leasing Association (FLA), which lobbies on behalf of car lenders, had warned the government that a big bill could end up disrupting the market, forcing some lenders to shut up shop, offer fewer loans or raise interest rates.
There were also fears it could expose lenders to complaints over commission payments across other financial products, such as appliances and furniture. The FLA said the supreme court decision was “an excellent outcome” that restored confidence to the sector.
In a statement on Friday, Close Brothers said: “Close Brothers is considering the supreme court’s judgment and will make any further announcements as and when appropriate.”
Peter Rothwell, the head of banking at KPMG UK, said the supreme court ruling provided “a clear path forward for lenders”. He added, however, that lenders should prepare for what was “still likely to be a significant customer redress exercise” under the FCA’s scheme.
The supreme court said on Friday that the single case filed by Johnson was upheld due to the size of the commission – which was worth 55% of the total loan – and because documents did not explain that a single lender was offered right of first refusal, rather than him receiving the best deal from a panel of lenders.
While Johnson failed to read the documents provided by the dealer, the supreme court noted that the borrower was “commercially unsophisticated, and the court questions the extent to which a finance company could reasonably expect a customer to have read and understood the detail of such documents, particularly when no prominence was given to the relevant statements.
“For these reasons, the court holds that the relationship between Mr Johnson and the finance company was unfair. The other customers’ claims are rejected.”
