Millions of UK drivers could be in line for compensation after a Court of Appeal ruling sent shockwaves through the car finance sector, with the Supreme Court set to deliver a verdict on hidden commission payments.
A case to determine whether millions of motorists are in line for compensation will be heard by the UK’s most senior judges this week. A Court of Appeal judgement last year sent shockwaves through the car finance sector, when it ruled that hidden commission payments to dealers were unlawful.
A car finance dispute occurs when a borrower and lender have differing opinions on loan repayment terms, interest rates, or other contractual obligations.
According to the Financial Ombudsman Service, over 10% of consumer credit complaints relate to motor finance issues.
To resolve disputes, borrowers should review their contract, gather evidence, and communicate with their lender.
The Financial Conduct Authority regulates car finance agreements, ensuring lenders comply with industry standards.
Companies claim they did nothing wrong and await much-needed clarity from the Supreme Court judges. Lenders, including major banks, have set aside huge sums of money as millions of people who bought new and used cars on finance could potentially make a claim for hundreds of pounds.
When Marcus Johnson bought his first car on finance, a dealer received £1,650 – a quarter of the amount he borrowed in total. ‘I had no idea that commission existed as part of the industry,’ he said. He simply bought a blue Suzuki Swift in 2017 to get back and forth from work and take his family out at weekends.
His case, along with two others, was a test case that led to a ruling at the Court of Appeal. Three judges unanimously agreed that it would be illegal for lenders to pay any commission to dealers without the informed consent of the buyer. In other words, customers should be told clearly how much commission would be paid – and agree to it – without those details being buried in the terms and conditions of the loan.
The car finance sector is the second biggest lender to consumers in the UK, with people only borrowing more in mortgages. The vast majority of new cars, and many second-hand ones, are bought with finance agreements. Dealers were signing up customers to these finance deals and, behind the scenes, were paid a commission by lenders.
The car finance sector has experienced significant growth in recent years, driven by increasing demand for new and used vehicles.
According to a report by the International Monetary Fund (IMF), global car sales reached 92 million units in 2020, with financing playing a crucial role in many of these transactions.
In the United States alone, over 85% of new vehicle purchases are financed through loans or leases.
The sector's growth is expected to continue, with estimates suggesting that global car finance volumes will reach $1.4 trillion by 2025.
The Financial Conduct Authority (FCA), the City regulator, said dealers and motor finance providers have been receiving a deluge of complaints. ‘We urge people to make a claim if they feel they were the victims of mis-selling,’ it said. Under the FCA’s plans, providers will have until December to consider and respond to complaints – but those cases will be hugely dependent on the judgement of the Supreme Court judges.
Even if the judges agree with the appeal from car finance providers, lenders are still facing a hefty compensation bill. That is because the FCA has already banned discretionary commission arrangements (DCAs), when the higher the interest rate on the loan, the higher the commission that was paid to dealers. The FCA is considering setting up a compensation scheme for drivers who had these deals before the ban in 2021.
Alex Neill, co-founder of Consumer Voice, which advises people on compensation, said the Supreme Court could agree with the Court of Appeal in saying all ‘secret’ commission payments were unlawful. If so, that would be huge and would be on the scale of PPI, with compensation payments running into the tens of billions of pounds. Even if not, then it still meant there could be compensation for 40% of car loan agreements with discretionary agreements.
The final ruling is expected during the summer, following three days of evidence from Tuesday. The Supreme Court rejected an unusual intervention from the government, which was worried huge amounts of redress payments could upset the car market and make it less competitive, as well as making the UK less attractive to investors.
Adrian Dally, from the Finance and Leasing Association, said: ‘We hope that the Supreme Court settles the issue once and for all, confirms that the industry did nothing wrong historically, and clarifies what the rules are permanently for the future.’ Dame Meg Hillier described the situation as ‘one unholy mess’ because dealers and lenders may not have been transparent to their customers.
