The UK’s highest court took an important decision last week. It backed up finance companies in a long-running test case on the legality of commission payments received by car buyers through dealerships. This decision strikes at the very heart of protection for consumers and lenders. More importantly, it would prevent the finance industry from being hit with a huge £44 billion bill related to secret commission payments embedded into car finance deals.
The case originated from an appeal brought by two specialist lenders, Close Brothers and South Africa‘s FirstRand. In doing so, they sought to chip away at a recent, highly publicized Court of Appeal ruling. That decision had been a victory for three consumers who had long held that the commission arrangements were illegal. The Supreme Court has upheld one consumer case, courtesy of Marcus Johnson. This ruling touches on profound issues of justice, looking at whether complicated financial agreements constitute both transparency and honesty between consumers and lenders.
The Supreme Court, 9-0, chastised the lower court for calling Johnson “commercially unsophisticated.” This characterization highlights the issues with whether consumers can ever truly understand the intricacies of multilayered financial contracts. The decision emphasized the underlying unjust, debtor-creditor dynamics at play between Johnson and the finance settlement claimant. Perhaps most significantly, it shone a light on the information asymmetry that pervades consumer/lender transactions in the student loan space.
As Johnson argued, the court ruled in favor of her discrimination case. It rejected the claims of two other plaintiffs who contended that dealer commissions were bribes, and that dealers had a fiduciary duty to their customers. It’s an unfortunate and very confusing outcome that has left many consumers in the dark as to what they may be entitled to.
Seminal judgment Analysis by financial guru Martin Lewis, founder of MoneySavingExpert.com, on the implications of the judgment. He estimated lenders to be looking at compensation payouts of up to £15 billion to £5 billion. He explained that relief would extend to “single-digit millions” of borrowers. Lewis warned consumers not to react too quickly. The Financial Conduct Authority (FCA), now responsible for the consumer protection mandate, is still assessing what the judgment means and how affected customers should be compensated.
“If those firms went bust, no one would get any compensation.” – Martin Lewis
Commenting on the Supreme Court ruling, Peter Rothwell, head of banking at KPMG UK, said. Most importantly, he argues that it provides “clear path forward for lenders.” He acknowledged that there will still likely be “a significant customer redress exercise,” implying that some form of restitution may still be necessary for affected consumers.
The Finance and Leasing Association (FLA) welcomed the decision. We have welcomed this development as “an excellent outcome,” with the objective of restoring confidence in the sector. In a statement, a spokesperson for the Treasury Department said that they respected the Supreme Court’s decision. They should work with regulators and industry experts to understand its broader impact on financial firms and consumers.
“We respect this judgment from the supreme court and we will now work with regulators and industry to understand the impact for both firms and consumers.” – Treasury spokesperson
In the UK market, around 80-90% of new vehicles and an increasing portion of the used market vehicles are financed through loans. What does this ruling mean for the future of transactions? We expect the Treasury to closely monitor the impact of this ruling on both industries, ready to propose any necessary regulatory action to protect consumer rights.
The FCA has promised to act with haste in the wake of the judgment. They announced plans to work through the weekend to analyze the ruling and determine their next steps in addressing consumer concerns.
“We want to bring greater certainty for consumers, firms and investors as quickly as possible. We will be working through the weekend to analyse the judgment and determine our next steps.” – FCA