The Supreme Court has largely sided with banks in a ruling involving a car finance scandal – but the issue is far from over, with huge implications for more than 20 million drivers
The Supreme Court has partially overturned a landmark ruling on car finance commissions. The move will have huge implications for banks that may have faced tens of billions of pounds in compensation payouts.
However, experts are poring over the ruling to assess what it means for the up to 23 million drivers who were expecting a payout.
The Treasury 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.”
Like all these things, the ruling was far from straightforward and is still being pored over in detail. But essentially the judges largely sided with the finance firms in the case, with all other banks breathing a sigh of relief because of what it could have meant for them too.
It centred on commissions that were paid by finance firms to dealers when selling, in these cases, second hand cars. As the ruling said, there was “either no disclosure to the customer of the existence of the commission or partial disclosure to the effect that a commission (of unspecified amount) might be paid”. The three customers involved claimed that the commissions amounted to “bribes”, or to “secret profits” received by the dealers.
Essentially, the Supreme Court was looking at whether hidden commission payments to dealers – even when the interest rate on the finance deal was set in advance – were unlawful. It could have seen compensation paid to almost all people who had bought a car on finance. Some estimates had put the potential bill at up to £45billion.
However, in one of the cases the court did decide the level of commission was unfair, with all the interest to be paid back.
So is that the end of it?
Yes, and no. It reduces the number of people who could have potentially received compensation, and lowers the possible bill to banks and finance houses. But there is a separate – though linked – issue around how some dealers were paid bigger rewards if buyers were charged higher interest rates. These so-called discretionary commission arrangements were banned by regulators in 2021.
Around 40% of all car finance deals arranged between 2007 and 2021 had this discretionary – rather than fixed – element to them. It is these cases that first led to concerns by regulators and which will now be of focus.
What happens next?
The Financial Conduct Authority launched an investigation into discretionary commission arrangements early last year. It had put the matter on ice until the outcome of the Supreme Court cases. It has acted swiftly by announcing it will confirm over the weekend if it will launch a scheme for victims of car finance mis-selling to get compensation. Whether there will be such a redress scheme and how it will work will be part of any consultation that takes place.
How might it work, and what might I get back?
These are key questions for any consultation, if such a scheme is announced. One option is for banks to go back through their records to assess which customers were affected, although this industry-led approach may well be seen as flawed. Another is almost like the PPI scandal, where firms would be forced to pay out to anyone where the discretionary commission applied.
There is a good chance it will be automatic – and free – which is why people are being warned about using claims management firms that may end up taking a big chunk of any payout.
Then there is the question of how much the compensation would be. It could that customers receive back the same amount as the dealer got in commission. Alternatively, it could be that the interest rate charged is compared with what it would have been had the commission not applied. The customer could then receive the over-payment, in other words the additional interest that was charged. Or it could be all the interest is paid back.
Consumer champion Martin Lewis, founder of Moneysavingexpert.com, estimated the level of refunds could now be anything from £5billion to £15billion, but “rather than the up to £45billion if the Supreme Court had upheld all of it.”
He added: “My biggest message is while we wait is, don’t do anything. Don’t sign up to a claims form. You don’t need to do anything right now. Take you hands, sit on them.”