The supreme court has partly overturned a lower court decision on the car finance commission scandal, closing the door to compensation except in more serious cases.
In their ruling, a panel of justices led by the supreme court president, Lord Reed, only upheld one consumer’s case, originally filed by borrower Marcus Johnson. Cases brought by two other consumers – alleging that commissions paid to car dealers were bribes and that dealers owed a duty of loyalty to the customer – were rejected.
The decision will be a blow to many consumers and the claims industry.
However, the door is still open to a more limited compensation scheme being considered by the Financial Conduct Authority. Many believe the regulator is likely to still announce a central compensation scheme for those consumers whose loan agreement had a “discretionary commission arrangement” – a type of loan that has now been banned.
The FCA has previously said it will launch a scheme within six weeks of the supreme court judgment.
The supreme court case at was launched by two specialist lenders, Close Brothers and South Africa’s FirstRand, in an attempt to challenge three consumers who collectively won a court of appeal case in October. The supreme court was 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 Financial Conduct Authority (FCA), and vastly expanded a scandal that had previously focused on a specific type of commission arrangement that was banned in 2021.
It also 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 nearly rival the payment protection insurance (PPI) saga, which cost banks £50bn.
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.
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The potential bill for industry, has caused concern among Labour ministers. The chancellor, Rachel Reeves, tried to intervene in the supreme court hearing in January, when she urged judges to avoid handing “windfall” compensation to borrowers.
The Guardian revealed last week that Rachel 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 upheld the entirety of October’s court of appeal ruling.
More details to follow soon …