Lenders triumph in car financing dispute, setback for motorists at the Supreme Court
The Supreme Court has made a ruling on undisclosed commissions in car finance deals, concluding that no fiduciary or disinterested duty arises in dealer-lender-customer arrangements, rejecting claims of bribery and fiduciary duty. However, it upheld one case where the relationship was deemed unfair due to a high undisclosed commission and lack of disclosure.
In this case, Marcus Johnson, one of the motorists, was awarded individual compensation due to the circumstances in his case. The court found that the relationship between Mr. Johnson and the finance company was unfair, as he paid a significant commission as part of his finance agreement, and the dealers increased their profits without disclosing this to the buyers.
Despite this partial lender victory, the Financial Conduct Authority (FCA) is proceeding separately, planning a compensation scheme for consumers who were sold car finance without being informed of dealerships’ commission. The FCA estimates compensation could total between £9 billion and £18 billion, though payouts per consumer are expected to be modest, likely under £950.
The drivers involved in the Supreme Court case all used car dealers as brokers for finance arrangements for second-hand vehicles worth less than £10,000. Three of these motorists, including Mr. Johnson, had not been told clearly or at all that car dealers would receive a commission from lenders for introducing business.
The FCA's investigation, set to conclude soon, is distinct from the Supreme Court ruling and will further clarify consumer redress eligibility. Nikhil Rathi, the FCA's chief executive, stated that there are cases where there could be arrangements that have been unfair. The FCA is using its powers to review historical motor finance commission arrangements across multiple firms - all of whom deny acting inappropriately.
The second case focuses on discretionary commission arrangements (DCAs) - a practice banned by the FCA in 2021. The court has found that the Court of Appeals' ruling on car finance was, on many grounds, incorrect. The Supreme Court allowed the appeals brought by two lenders, FirstRand Bank and Close Brothers.
In January 2024, the FCA announced a review into whether motor finance customers had been overcharged because of past use of DCAs. The FCA will study the judgment and could consult on an industry-wide compensation scheme to provide fairness for consumers. This is largely considered a win for the banks, as the court sided with them on the majority of the cases.
The drivers involved in the case had all bought their cars before 2021 and should receive compensation, according to the court. The judgment significantly limits the scope of potential payouts to motorists, as it only applies to cases where the relationship was deemed unfair due to high undisclosed commissions and non-disclosure.
In conclusion, the Supreme Court ruling upheld an unfair relationship in one case based on high undisclosed commission and non-disclosure, while rejecting claims of bribery and fiduciary duty. The FCA is preparing a separate compensation scheme based on non-disclosure and unfair practices, with substantial total payouts anticipated though individual payments may be small. The drivers involved in the case should receive compensation if the relationship was deemed unfair, and the FCA's investigation will further clarify consumer redress eligibility.
The Supreme Court's ruling suggests that the non-disclosure of high commissions in car finance deals can lead to an unfair relationship for consumers, as was the case with Marcus Johnson. This ruling follows allegations of bribery, fiduciary duty, and undisclosed commissions in business transactions between car dealers, finance companies, and buyers. The Financial Conduct Authority (FCA) is planning to compensate consumers who were not informed about dealerships' commissions, which could amount to £9 billion to £18 billion in total.
