Supreme Court rules on car loan commission cases

The Supreme Court has ruled lenders are not liable for hidden commission payments in car finance schemes – avoiding them potentially having to pay compensation to millions of drivers.

The controversy erupted after a Court of Appeal ruling in October last year, which dramatically expanded a Financial Conduct Authority (FCA) investigation into car finance commissions. 

The Court of Appeal found that car dealers receiving undisclosed commissions for arranging loans had engaged in unlawful practices.  

Lenders including Close Brothers and FirstRand were seeking to overturn that ruling in a Supreme Court hearing in April.

The three appeals involved in the car loans commission ruling involved Andrew Wrench, Louise and Carl Hopcraft, and Marcus Johnson, who had cars bought on credit supplied by either FirstRand Bank or Close Brothers.

Announcing that lenders are not liable for hidden commission payments today (Friday, August 1), the Supreme Court, however, upheld Johnson's claim “that the relationship between him and the finance company was unfair”, under the Consumer Credit Act (CCA).

Following publication of the 110-page judgement, Supreme Court president, Lord Reed, announced that the court was allowing the appeals brought by the finance companies against an earlier ruling.

However, he added: “We uphold Mr Johnson's claim that the relationship between him and the finance company was unfair, and we allow the appeal in his case only because the Court of Appeal made a number of mistakes in reaching its decision.

“Re-taking the decision on a proper basis, we award him the amount of a commission plus interest. The other customers' claims are rejected.”

He explained that he had rejected the claims based on bribery, on the basis that the payment of a commission was not a bribe.

“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,” he said.

“In the present case, the car dealers, plainly and properly, had a personal interest in the dealings between the customers and the finance companies… they were motivated throughout by their interest in selling cars at a profit, it follows that they did not owe any fiduciary duty to the customers.

“Each party to the three corners arrangement, the customer, the dealer and the finance company was engaged at arm’s length from the other participants in the pursuit of its own objectives.

“Neither the parties themselves, nor any onlooker could reasonably think that any participant was doing anything other than considering its own interests.”

The decision came late on Friday (August 1st) at 4.35pm, following a request by the Financial Conduct Authority (FCA), which was concerned that the ruling, whatever it might be, may have on the financial markets, which closed at 4.30pm.

“We will be working through the weekend to analyse the judgment and determine our next steps,” the FCA  

Stephen Haddrill, director general at the Financie and Leasing Association (FLA), said: “This judgment is an excellent outcome. It properly reflects the role and responsibilities of dealers, lenders and customers, and it has restored certainty and clarity to the largest point-of-sale consumer credit market in the UK.  

“In addition, it has also restored confidence to the sector, confirming that it remains a solid investable option – which in turn means the supply of affordable motor finance will continue for customers.

“Cars are an essential part of UK life – and for many people, relying on a car means relying on motor finance. It’s a product that’s trusted and valued by our customers – just over 80% of new cars are bought on finance, as is a large percentage of used cars.

“The FCA now has the legal clarity to continue its work to establish if a redress scheme is needed, and of course the thousands of unfounded complaints submitted to lenders by claimant law firms and CMCs can now be removed from the system.”  

Sue Robinson, chief executive of the National Franchised Dealers Association (NFDA), representing car and commercial retailers, also welcomed the Supreme Court’s decision.

She said: “As the consumer facing part of the sector, NFDA want to see the regulator act fairly to ensure that UK consumers receive a satisfactory result. This has been achieved today.

“Automotive retail accounts for approximately 78% of the broader automotive workforce, we provide a perspective that is at the coal face of dealing with customers.

“As we move forward from this case NFDA will continue to provide support to its members ensuring that the UK has a healthy and functioning motor retail market.”

The car finance scandal has drawn comparisons to the payment protection insurance (PPI) mis-selling crisis, with analysts warning before today’s judgement that the final cost to lenders could reach £40-50 billion.

Major lenders had set aside funds in preparation for potential payouts, with Lex Autolease owner Lloyds announcing earlier this year that it had earmarked £1.25 billion in preparation for such a scenario.

The Government even attempted to intervene in the case, because of the potential impact to the sector. 

In February, the Supreme Court rejected an intervention from the Treasury, which was worried huge amounts of redress payments could upset the car market and make it less competitive.

The Treasury has said it wants to see a “balanced judgement” that delivers compensation proportionate to losses that consumers have suffered and allows the motor finance sector to continue supporting millions of motorists to own vehicles.

Reacting to taday's ruling, a Treasury spokesperson said: “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.”

The spokesperson added: “We recognise the issues this court case has highlighted. That is why we are already taking forward significant changes to the Financial Ombudsman Service and the Consumer Credit Act.

“These reforms will deliver a more consistent and predictable regulatory environment for businesses and consumers, while ensuring that products are sold to customers fairly and clearly.”

Ian Hughes, CEO of Consumer Intelligence, believes that the Court has “got it right”. He explained: “They’ve targeted the exceptional cases without punishing standard business practices. This provides the clarity the industry needed whilst ensuring accountability where it’s genuinely warranted.

“The industry must meet this challenge constructively. This is an opportunity to demonstrate an unwavering commitment to fairness.

“It’s vital we don’t confuse widespread historic practice with deliberate wrongdoing. The vast majority of firms operated fairly, even if disclosure clarity fell short.

“Targeted, structured redress will ensure fairness without punishing responsible firms . It’s important to remember the industry had already moved away from discretionary arrangements following FCA rule changes in 2021. This ruling effectively tidies up the legacy.

“The FCA’s enhanced Consumer Duty already guides better transparency and outcomes in the market. By working in close partnership with the FCA on a pragmatic redress framework, the industry can correct past wrongs caused by a few bad actors, draw a final line under this issue, and ultimately strengthen consumer trust.

“It is crucial to remember that this is a consequence of legacy practices from a minority of market participants. We urge the FCA to work closely with the industry to design a redress framework that is manageable, efficient, and minimises undue market disruption.”

The FCA, which was already looking into historic discretionary commission arrangements (DCAs), said, prior to today's decision, it was looking at setting up a formal compensation scheme once the Supreme Court had delivered its final ruling.

An FCA spokesperson said: “It will take time to digest the judgment. 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.”

The spokesperson added: “We said we would set out within six weeks whether we would consult on a redress scheme. But we want to provide clarity as quickly as possible. So, we will confirm whether we will consult on a redress scheme before markets open on Monday 4 August.

“Our aims remain to ensure that consumers are fairly compensated and that the motor finance market works well, given around two million people rely on it every year to buy a car.

“If we do decide to propose a redress scheme, we'll consult widely. In designing a redress scheme, as we have previously said, we will balance principles including fairness, timeliness, and certainty.”

Background to the three car loan commission cases

The three linked appeals involved cases originally brought by claimants Andrew Wrench, Louise and Carl Hopcraft, and Marcus Johnson, involving cars bought on credit supplied by either FirstRand Bank or Close Brothers.

On each relevant occasion, only one offer of finance was presented to, and accepted by, the claimant.

FirstRand Bank provided the finance in Johnson’s and Wrench’s transactions. The lender in the Hopcrafts’ case was Close Brothers.

In each instance, the dealer made a profit on the sale of the car but also received a commission from the lender for introducing the business to them.

In the Hopcrafts’ case, the commission was kept secret from the claimants.

Wrench and Johnson were both unaware that a commission would be paid, but the lender’s standard terms and conditions made reference to the payment of a commission (of unspecified amount).

Johnson was also supplied with a document, which he signed, indicating that the dealer could receive a commission from the lender.

Each of the claimants brought proceedings in the County Court. All three claimants contended that the commissions amounted to bribes at common law, or to secret profits received by the dealers as fiduciaries in equity.

Wrench was successful before the District Judge at first instance but the Circuit Judge allowed the lender’s appeal.

Johnson’s claims were unsuccessful at first instance, as well as on first appeal except for his claim under the Consumer Credit Act (CCA) which was forwarded to the District Judge for reconsideration.

The Court of Appeal subsequently granted permission for a second appeal in both cases.

The Hopcrafts’ claims were unsuccessful at first instance and their first appeal to a Circuit Judge was then transferred to the Court of Appeal.

They were successful in the Court of Appeal either on the basis of the tort of bribery or on the basis of dishonest assistance. Johnson was also successful in his claim under the CCA.

This story is continuously being updated...