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Car finance: Millions denied payouts after Supreme Court ruling Car finance: Millions denied payouts after Supreme Court ruling
(32 minutes later)
Millions of motorists will not be able to claim compensation for hidden commissions paid on car loans following a Supreme Court ruling.Millions of motorists will not be able to claim compensation for hidden commissions paid on car loans following a Supreme Court ruling.
The UK's highest court sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other credit providers to car dealers. The UK's highest court sided with finance companies in two out of three crucial test cases focusing on commission payments made by banks and other lenders to car dealers.
The decision reversed earlier rulings by the Court of Appeal that had opened the possibility of large-scale claims for compensation from motorists on a similar scale to the Payment Protection Insurance (PPI) mis-selling scandal. The decision reversed earlier court rulings that had opened the possibility of large-scale compensation claims from motorists on a similar scale to the PPI mis-selling scandal.
Delivering the ruling, Lord Reed said car dealers "plainly and properly" had an interest in profiting from the deals. But many drivers who took out a certain type of finance deal could still be in line for payouts. The UK's financial regulator, who is considering a compensation scheme, said it would "take time to digest the judgement".
The Supreme Court heard three cases in the joint appeal, brought by two lenders FirstRand bank and Close Brothers.
The lenders were challenging a Court of Appeal ruling which found that it was unlawful for car dealers to receive hidden commission from lenders when they sign customers up for motor finance before 2021.
That ruling put millions of motorists in line for compensation depending on how their car loan interest rate was set, and exposed lenders to potentially billions of pounds worth of payouts.
Delivering the court's decision, Lord Reed said the motorists had argued that the dealers had a fiduciary duty - an obligation to put the customer's needs above their own - but the court disagreed.
"At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller," Lord Reed said."At no point did the dealer give any kind of express undertaking or assurance to the customer that in finding a suitable credit deal it was putting aside its own commercial interest as seller," Lord Reed said.
But the court ruled against the lender in the case of Marcus Johnson, saying the commission paid to the dealer was so significant - 55% of the total charge or credit including interest and fees – that it was a "powerful indication" the relationship between Mr Johnson and lender FirstRand was unfair.But the court ruled against the lender in the case of Marcus Johnson, saying the commission paid to the dealer was so significant - 55% of the total charge or credit including interest and fees – that it was a "powerful indication" the relationship between Mr Johnson and lender FirstRand was unfair.
The Supreme Court awarded Mr Johnson the amount of a commission plus interest.
Speaking after the decision, Mr Johnson said he was "pleased for myself, but not for the hundreds of others" who will miss out.Speaking after the decision, Mr Johnson said he was "pleased for myself, but not for the hundreds of others" who will miss out.
"It's weird," he said. "It's a win, but it's a really big bag of salt to go with it"."It's weird," he said. "It's a win, but it's a really big bag of salt to go with it".
The Supreme Court heard three cases in the joint appeal, brought by two lenders FirstRand bank and Close Brothers. About two million new and used cars are bought each year under motor finance, according to the FCA, or roughly nine in 10.
The lenders were challenging a Court of Appeal ruling which found that it was unlawful for car dealers to receive hidden commission from lenders when they sign customers up for motor finance before 2021. However, about four in 10 cars sold before 2021 were sold through a now-banned method called discretionary commission arrangements.
That ruling put million motorists in line for compensation depending on how their car loan interest rate was set, and exposed lenders to potentially billions of pounds worth of payouts. The UK's financial watchdog, the Financial Conduct Authority (FCA), had been investigating complaints from motorists about these arrangements.
Reacting to the judgement, equity lawyer and Oxford University academic Dr Julius Grower said: "The strongest possible win for the lenders was this outcome and they got it." Under these deals, car dealers were paid more in commission if they clinched a higher interest rate on the loan. The practice has been banned since 2021.
But some motorists could still be eligible for redress, according to Richard Branwell a partner at advisory firm BDO, for a now-banned arrangement known as discretionary commission arrangements (DCA). Following the Supreme Court's decision, Richard Branwell a partner at advisory firm BDO, said some of those affected by discretionary commission arrangements could qualify for redress.
Under those finance deals, car dealers were paid more in commission if they cinched a higher interest rate on the loan. The practice has been banned since 2021.
"If discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from to £5 – £13 billion or more," Mr Branwell said."If discretionary commission arrangements are deemed to be an unfair relationship, redress could still be from to £5 – £13 billion or more," Mr Branwell said.
Following the Supreme Court's ruling, the FCA said: "We want to bring greater certainty for consumers, firms and investors as quickly as possible.
"So, we will confirm whether we will consult on a redress scheme before markets open on Monday 4 August."
Reacting to the judgement, equity lawyer and Oxford University academic Dr Julius Grower said: "The strongest possible win for the lenders was this outcome and they got it."
Alex Neill, co-founder of consumer rights group Consumer Voice said it was a "disappointing" ruling but welcomed the fact the court had "made it clear where consumers deserve redress".
"The financial regulator must now urgently act to introduce a redress scheme that ensures drivers get back what they're owed," he said.
The director general of the Finance and Leasing Association, Stephen Haddrill, said the judgement was "an excellent outcome" that "restored certainty and clarity" to the car market.
A Treasury spokesperson said the government "respected the judgement" and it would "work with regulators and industry to work out the impact for businesses and customers".