Millions of motorists could be entitled to compensation on their hire-purchase agreements as the car finance mis selling case finally comes to its conclusion today.
While the details of compensation will take longer to be announced, the verdict could have a huge bearing on if, and how much, money is awarded.
In October last year, the Court of Appeal ruled that “secret” commission payments to car dealers as part of finance arrangements made before 2021 without the motorist’s fully informed consent were unlawful.
The court found that three motorists, who all bought their cars before 2021, had not been told either clearly enough or at all that the car dealers, acting as credit brokers, would receive a commission from the lenders for introducing business to them, and should receive compensation.
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Two lenders, FirstRand Bank and Close Brothers, took the row to the Supreme Court, telling a three-day hearing in April that the decision was an “egregious error”.
The Financial Conduct Authority (FCA) has also intervened in the case, telling the UK’s highest court that the Court of Appeal ruling “goes too far”, while the three motorists oppose the challenge.
Lords Reed, Hodge, Lloyd-Jones, Briggs and Hamblen are due to hand down their ruling this afternoon.
The FCA told the Supreme Court last year that almost 99% of the roughly 32 million car finance agreements entered into since 2007 involved a commission payment to a broker.
The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, all used car dealers as brokers for finance arrangements for second-hand cars, all worth less than £10,000.
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Only one finance option was presented to the motorists in each case, with the car dealers making a profit from the sale of the car and receiving commission from the lender.
The commission paid to dealers was affected by the interest rate on the loan.
The schemes were banned by the FCA in 2021, with the three drivers taking legal action individually between 2022 and 2023.
After the claims reached the Court of Appeal, three senior judges ruled that the lenders were liable to repay the motorists the commission, as there was “no disclosure” of the commission payments in Ms Hopcraft’s case, and “insufficient disclosure” in the case of Mr Wrench.
In Mr Johnson’s case, the judges found that he had received “insufficient disclosure” about the commission to give “fully informed consent” to the payment.
Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said that while each case was different, “burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice” as enough to properly inform a motorist about the commission.
If justices dismiss the challenge, it is unclear how many people could be entitled to compensation.
If they side with the lenders, then it is likely to significantly limit the scope of potential payouts to motorists.
The FCA has said it will confirm within six weeks of the judgment whether it is planning to launch a redress scheme.
Why is the Supreme Court case so important for people who bought cars on finance?
Wayne Gibbard, who leads the automotive finance practice at law firm Shoosmiths, said the Supreme Court decision will be “absolutely fundamental to what happens next” for the sector.
It will inform the scale of potential compensation for customers, which will be overseen by the UK’s Financial Conduct Authority.
The FCA previously said that, if it thinks there was widespread harm to consumers as a result of commission payments, then it could set up an industry-wide redress scheme.
It said it will confirm within six weeks of the Supreme Court judgment whether it is planning to launch such a scheme.
He said: “People can make an informed decision – the query is around their harm, have they been mis-sold something?
“And I think that’s been absent in the conversation.”
What does it mean for consumers who were sold car finance?
If Supreme Court judges side with the claimants then it could mean that many people who took out a car loan before 2021 may be due a payout, although it is difficult to say at this point how many.
If it sides with the lenders, then it is likely to significantly limit the scope of potential payouts to motorists.
However, the FCA is still looking at compensation for potential mis-selling of some types of motor finance arrangements – known as discretionary commission arrangements (DCAs) – so this could go ahead regardless.
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Does it mean I am entitled to compensation?
If the FCA decides to proceed with a redress scheme, it is likely to clarify what type of motor finance arrangements it applies to – and potentially include all deals where people were not told clearly enough, or at all, that the car dealer was receiving commission.
A scheme is intended to be simpler for consumers than making a direct complaint to providers.
The watchdog said it would expect “fewer consumers to rely on a claims management company, meaning they would keep all of any compensation they receive” and would be “more orderly and efficient for firms than a complaint-led approach”.
Mahesh Vara, a legal director for Shoosmiths, said a decision that secret commission payments were unlawful would “naturally be a boon to claimants firms and consumers”.
“I think this is one of the first large-scale consumer mis-selling “scandals” of the social media digital age,” he said.
“It’s now leading to a greater expectation of there being almost a guaranteed payment. That is what the FCA will have to consider.”
Advertisements from claims management companies have sprung up significantly in the lead-up to the court decision, but some regulators have been warning against using them as people may be charged for a service they ultimately do not need.
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What could it mean for the wider industry?
Approximately 80% of new cars are purchased using motor finance in the UK, so the decision could have significant consequences for this industry.
Mr Gibbard said: “The FCA has got to make sure the market is stabilised – this is the second biggest credit market outside of mortgages.
“This is more than provision of credit – this is people getting to work, taking somebody to hospital, taking the kids to the playground – so this is a real facilitator for the economy.
“I think there is a risk, but everybody is so acutely aware of that risk so hopefully it won’t have that disruptive effect.”
Mr Gibbard also said a decision could have “far-reaching consequences” with other parts of the financial services sector also potentially coming under pressure for commission payments on loans.
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