Car finance scandal: Supreme Court verdict could unlock billions in compensation

Highlights

• Supreme Court to deliver ruling at 4:35pm today on £44bn car finance mis-selling scandal
  
• Judgment concerns hidden commissions paid to dealers without disclosure to buyers
  
• Potential for billions in compensation claims if appeal court ruling is upheld
  
• FCA expected to confirm next steps within six weeks
  
• Lenders argue practices were lawful; Treasury warns of market impact
  

Supreme Court Poised to Rule on Landmark Car Finance Case

The UK Supreme Court will issue a verdict that could reshape the car finance industry and trigger billions of pounds in compensation claims for mis-sold motor finance.

The judgment, expected at 4:35 pm Friday, will determine whether to uphold a Court of Appeal ruling from October, which found that undisclosed commissions paid by lenders to car dealers or brokers were unlawful.

The Test Case: Undisclosed Broker Commissions

The case centres around two lenders – FirstRand Bank and Close Brothers – who were found to have paid commissions to dealers arranging finance deals, without disclosing the amount or terms of those payments to borrowers.

This practice was deemed unlawful by the Court of Appeal. If the Supreme Court upholds that ruling in full, the decision could pave the way for millions of customers to seek redress for loans arranged under similar conditions.

Wider Financial Implications for the Industry

The car finance market is deeply embedded in UK car sales, with around 90% of new cars and a significant proportion of second-hand vehicles bought on finance.

A full ruling against lenders could result in huge financial liabilities for the sector. Lloyds Banking Group, heavily exposed through its Black Horse division, has already set aside £1.2 billion in anticipation of potential claims.

The Financing & Leasing Association, which represents lenders, has continued to maintain that no wrongdoing occurred.

The Role of Discretionary Commission Arrangements

At the centre of many complaints are Discretionary Commission Arrangements (DCAs), which were banned by the Financial Conduct Authority (FCA) in 2021. Under DCAs, dealers could increase their commission by steering customers toward higher interest rates.

Thousands of consumers who purchased vehicles using DCAs before the ban are already in line for possible compensation.

What Happens Next

The FCA is expected to announce within six weeks of the Supreme Court ruling whether it will establish a centralised compensation scheme for affected borrowers. However, today’s ruling could dramatically widen the pool of those eligible for payouts if it affirms the appeal court’s full findings.

If the judges side with the lenders, the scope of potential redress will be much narrower.

Government Concern Over Financial Fallout

The UK Treasury had previously raised concerns about the potential financial impact of large-scale compensation, warning it could significantly disrupt the car finance market. The Supreme Court rejected the government’s unusual intervention request in February, affirming judicial independence in the matter.

While the Treasury supports fair outcomes for consumers, it has also cautioned that the sector must remain capable of providing essential finance options for car buyers.