The UK’s Supreme Court has delivered a significant ruling affecting the motor finance industry, particularly concerning commissions paid to dealers by lenders. The claimant in the case had been the specialist lenders Close Brothers and FirstRand. It zeroed in on whether dealers could legally accept these commissions without telling their customers. Yet in October 2024, a lower court found that those kinds of commissions were illegal unless the customers’ informed consent was obtained. Close Brothers and FirstRand appealed their case all the way to the Supreme Court. The court, in the end, agreed with consumer Johnson, finding that finance companies maintained deceptive and unfair connections with their patrons.
The court’s decision may pave the way for increased redress opportunities for consumers who have been affected by similar practices. This ruling will have a huge effect on the motor finance industry. Firms will now have to pay interest on this compensation which would create potentially massive financial liabilities for claims going back several years.
Background of the Case
A group of aggrieved consumers waged a lawfare campaign against mortgage lenders. In particular, they contested the fairness of Discretionary Commission Arrangements (DCAs). Before their ban, DCAs were the staple of the motor finance market. Between 2007 and 2020, nearly three in four contracts took advantage of this commission structure. According to the Financial Conduct Authority (FCA), consumers have been overcharged by as much as £1,100. This figure relates to an average £10,000 car finance deal with a DCA.
The FCA has previously agreed that there were problems with the motor finance market. Over the past year, the regulator forced 224 motor finance commission advertisements to be modified or removed entirely due to misleading practices. As such the Solicitors Regulation Authority (SRA) has opened an investigation. They are investigating 73 private law firms for possible violations involving such commission agreements.
“Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well,” – FCA.
Implications of the Ruling
The Supreme Court’s judgment marks an important turning point for UK consumers in the contested motor finance market. Consumers such as Johnson might finally have stronger access to redress against inequitable financial practices long left unchallenged. Legal experts are cautioning that this decision will open the floodgates for more claims. Hundreds could be stepping forward, convinced that they too have been taken advantage of under these same commission schemes.
Consumer specialists are predicting that the FCA will soon set out a scheme of redress for all consumers affected. Richard Coates, a legal analyst, stated, “It is anticipated that the FCA will bring redress for those cases where it is deemed that the relationship is unfair, and we expect to learn more from the FCA about this redress scheme within the next six weeks.”
The ruling paves the way for firms to be held financially accountable in a potentially major way. If the FCA proceeds with a redress scheme, lenders can expect to pay consumers redress for at least some of the overcharged amounts. This huge payment may cover interest that builds up over the course of many years.
Future of Motor Finance Commissions
Implementation of the ruling creates uncertainty, as it is yet to be seen how the motor finance industry will respond. Some 80-90% of UK car sales are financed by new vehicles purchased under loans arranged through brokerages that pocket large commissions. With a growing pool of used vehicles doing the same thing, their business model would have to undergo radical changes. Firms will need to revisit their commission makeup and be prepared for the new requirements to avoid being legally challenged yet again.
The Treasury acknowledged the judgment’s significance, stating, “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.” This statement signals an understanding of the need for balance between protecting consumer rights and maintaining a sustainable financial environment for lenders.
Though businesses are missing their doors, fraud and pandemic claims alike have drawn the ire of accusatory claims management companies. Reports indicate that certain firms are merely fishing for customer “leads,” which they subsequently sell to third-party law firms for a fee. This practice poses egregious ethical implications for consumer protection. Further, it represents the key necessity for tighter regulation in the predatory claims management industry.