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 credit providers to car dealers.
The decision reversed earlier rulings by the Court of Appeal that had opened the possibility of large-scale claims for compensation from motorists on a similar scale to the Payment Protection Insurance (PPI) mis-selling scandal.
Delivering the ruling, Lord Reed said car dealers “plainly and properly” had an interest in profiting from the deals.
“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.
But the court ruled against the lender in the case of Marcus Johnson, saying 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.
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”.
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 million 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.
Reacting to the judgement, equity lawyer and Oxford University academic Dr Julius Grower said: “The strongest possible win for the lenders was this outcome and they got it.”
But some motorists could still be eligible for redress, according to Richard Branwell a partner at advisory firm BDO, for a now-banned arrangement known as discretionary commission arrangements (DCA).
Under those finance deals, car dealers were paid more in commission if they cinched a higher interest rate on the loan. The practice has been banned since 2021.
“If discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from to £5 – £13 billion or more,” Mr Branwell said.