The Supreme Court’s ruling is likely to bring a sense of relief to senior executives in the finance and banking sectors, though overt celebrations are unlikely.
The verdict significantly reduces the potential financial burden of compensation payouts.
Lenders are no longer facing the prospect of compensating aggrieved car buyers to the tune of £30bn to £40bn. The likelihood of government intervention also appears to have lessened considerably.
However, the industry is not entirely exonerated. The Financial Conduct Authority (FCA) may still initiate a redress scheme for cases where dealers were financially incentivized by lenders to inflate interest rates on loans.
The Supreme Court did uphold one consumer claim, deeming the commission payments unfair, which could serve as a precedent for future cases. As such, the total compensation could still reach billions.
The Supreme Court’s intervention had been highly anticipated since October, following an Appeal Court verdict in three test cases that potentially could have triggered a wave of compensation claims.
In each instance, individuals who had financed car purchases claimed they were not fully aware that the deals included commission payments from the lender to the car dealer. They argued that these commissions were effectively bribes or undisclosed payments.
The Appeal Court judges concurred, stating that commission payments from a finance company to a dealer for arranging a car loan were unlawful if the car buyer had not provided “informed consent.”
The court also asserted that a car dealer had a “fiduciary duty” to the car buyer when arranging a car loan, implying that the dealer should prioritize the customer’s interests above their own.
This meant that millions of car buyers could potentially claim compensation if they could demonstrate that the dealer had not explicitly disclosed the commission payments received for securing the finance deal. Disclosure in fine print was deemed insufficient.
Lenders feared that this would unleash a torrent of claims against them, with the same arguments potentially extending to other consumer finance agreements, further escalating the compensation bill.
However, the Supreme Court significantly tempered these concerns. Lord Reed, President of the Court, rejected the notion that car dealers owed a “single-minded duty of loyalty” to their customers, asserting that they “plainly and properly” had personal interests in the finance agreements.
The ruling effectively closes off a potentially expansive avenue for compensation claims.
However, the court sided with one claimant, Marcus Johnson, a factory worker, determining that the finance agreement was “unfair” under the Consumer Credit Act.
The court cited the substantial size of the commission payment and the fact that Mr. Johnson had been misled about the relationship between the dealer and the lender. They concluded that he was entitled to compensation.
Analysts suggest this could pave the way for other cases involving excessively high commission payments.
A key question that remains unanswered by the Supreme Court ruling pertains to cases involving Discretionary Commission Agreements (DCAs). These agreements allowed car dealers to set loan interest rates within a specified range, with higher rates resulting in greater commission, often without the customer’s knowledge.
The FCA banned DCAs in 2021 and is now considering a redress scheme for affected consumers. If implemented, millions of car buyers could still have grounds for a claim, though the potential compensation amounts remain uncertain.
Richard Barnwell, a financial services advisory partner at BDO, suggests the bill could still be significant.
“We believe there is still a potential for redress, for example, if discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from to £5bn to £13bn or more,” he stated.
Other analysts concur. Martin Lewis, founder of MoneySavingExpert, noted that “the Supreme Court has certainly narrowed the number of people who will be able to reclaim car finance. I think you’re probably talking the lower end of £10bn, as opposed to £40bn.”
Even £10bn remains a considerable figure. However, the finance industry appears to have averted the potential free-for-all of compensation claims that the earlier verdict had threatened to trigger.
While the Treasury has stated it will “work with regulators and industry to understand the impact for both firms and consumers,” sources indicate that the likelihood of government intervention through retrospective legislation to protect financial firms has now substantially decreased.
The law of bribery only applies to persons who owe a single-minded duty of loyalty and are therefore bound to have no personal interest in the matter that they are dealing with.
In the present case the car dealers plainly and properly have a personal interest in the dealings between the customers and the finance companies.
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