Car finance compensation landmark ruling announced

Millions of motorists have been on the edge of their seats since it was revealed that some car dealers had been paying hidden commissions as part of finance arrangements without telling their customers.

This meant that many car buyers who purchased a second-hand vehicle before 2021 had to foot the bill for an extra 25% commission as part of their repayments without their consent.

The practice was banned in 2021, but three motorists who bought their used cars before this complained about the ‘unlawful’ arrangements, with their cases eventually reaching the Court of Appeal.

The Court of Appeal ruled in the motorists’ favour.

But financial providers – British lender Close Brothers and South African FirstRand – were unhappy with the outcome and took the case to the Supreme Court.

Although the court ruled against motorists, there might still be a way for compensation if you are affected (Picture: Getty Images)

Now the Supreme Court has announced its decision in the drawn-out case, which could shake up the industry.

The top judges ruled against motorists as they sided with the lenders, ruling they are not liable for hidden commission payments in car finance schemes.

Lord Reed said: ‘For the reasons set out in detail in a judgment published today, the Supreme Court allows the appeals brought by the finance companies.

‘However, 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.

‘Retaking the decision on a proper basis, we award him the amount of a commission plus interest.

‘The other customers’ claims are rejected.’

Three motorists, Marcus Johnson, Andrew Wrench and Amy Hopcraft, complained after finding out that they had been given only one finance option while the car dealers made a profit from the sale of the car and pocketed a commission from the lender.

The ruling could affect drivers who bought a second-hand car before 2021 (Picture: Getty Images)

Each had bought a second-hand car for less than £10,000.

The Court of Appeal judges had previously said that ‘burying such a statement in the small print which the lender knows the borrower is highly unlikely to read’ meant that the motorists could not be properly informed about the commission.

Almost 99% of around 32 million car finance agreements since 2007 involved a commission payment to a broker.

But today’s ruling in favour of the lenders is expected to limit the compensation payments to motorists.

Ahead of the decision, financial institutions had reportedly set aside billions for potential compensation.

HSBC analysts estimated last year that the price tag of the scandal could reach £44billion.

Marcus Johnson, one of three drivers whose case was involved in the Supreme Court appeal, said the ruling ‘does not sit right.

He bought his first car in 2017 and paid £1,650.95 in commission as part of his finance agreement with FirstRand for the Suzuki he purchased.

The 35-year-old, from Cwmbran in Wales, was awarded his commission and interest by the Supreme Court on Friday, meaning in total he received around £3,000.

Marcus said after the verdict was reached: ‘It does not sit right with me at all, to be honest.

‘I am obviously happy that my case was successful, but for so many other people that were also overcharged, I just don’t like the message it sends to the UK consumer.’

Shareholders at financial household names like Barclays, Santander, Lloyds Banking Group, and Close Brothers are likely to have let out a sigh of relief after the ruling today.

However, disappointed motorists could still have a way to claim compensation as the UK finance watchdog is considering launching its own redress scheme, independent of the court ruling.

Lenders are not liable for hidden commission payments in car finance schemes (Picture: Getty Images/iStockphoto)

The Financial Conduct Authority (FCA) has been looking into launching its redress scheme to help arrange compensation for affected motorists after running its own investigation into car finance issues.

The FCA will confirm within six weeks whether it will go ahead with the redress scheme.

Courmacs Legal, a law firm based in Blackburn, represents 1.5million consumers and is dealing with over 4million claims in relation to motor finance mis-selling and allegations associated with civil bribery and hidden commissions.

Responding to the verdict, managing director Darren Smith said: ‘The Court has ruled on the position in relation to certain types of commission arrangements. It has not ruled on the position where a discretionary element was applied to the commission.

‘It is even more important now that lenders make clear to customers the nature of their agreements, and if they were discretionary.

‘This still leaves many victims who will be entitled to redress but the story does not end here.

‘The next chapter will be in September when the Court of Appeal will be hearing a case relating to the way the Financial Services Ombudsman has dealt with discretionary commission arrangements.

‘The FCA have themselves identified this case as being relevant to the actions they may take so we call on the Government, the Regulators, the Lenders and their associations to allow the judicial process to be completed and to respect the rule of law before seeking to interfere in any way with the redress that these victims may be owed.’

The Treasury said it will work with the industry and regulators.

A 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.

‘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.’

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