Millions of motorists could soon be due compensation as part of a car finance ’secret’ commission scandal.
A landmark Supreme Court ruling expected today could see millions of car buyers who bought their vehicle on finance receive compensation.
The saga began when it was discovered that some car dealers had been paying hidden commissions as part of finance arrangements without telling their customers about it clearly.
In October, the Court of Appeal ruled that these ‘secret’ payments to car dealers made before 2021 without the motorist’s fully informed consent were unlawful, but lenders challenged this.
Now the UK’s top judges have to decide whether the ‘secret’ commissions were allowed – and this could have major ramifications for motorists and the sector.
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Here is a roundup of the case and what it could mean for drivers.
What is the Supreme Court car finance court case about?
There are two major cases running side by side – the Supreme Court ruling and a parallel investigation by the UK financial watchdog, the Financial Conduct Authority.
Today’s ruling is the final step in the drawn-out case, which started after three drivers came forward last year, saying they had been missold over car finance.
The drivers, who bought their cars before 2021, said they had not been told clearly enough or at all that the car dealers, who acted as credit brokers, would get a commission from the lenders as a reward for introducing business to them.
Their monthly bills to pay back the car were slapped with a 25% commission without their consent.
How the scandal started
Possible car finance issues first came to light after the three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, bought a second-hand car.
They used car dealers as brokers to negotiate the finance arrangements for the vehicles, all worth less than £10,000.
But they were given only one finance option, and the car dealers made a profit from the sale of the car and pocketed a commission from the lender.
The amount of the dealer’s commission was affected by the interest rate on the loan.
The Court of Appeal ruled in the motorists’ favour – before British lender Close Brothers and South Africa’s FirstRand appealed the ruling.
It is now in front of Supreme Court judges, who will decide today whether the commission arrangements behind motorists’ backs were unlawful or not.
The Financial Conduct Authority (FCA), has also been running its own investigation into car finance, and it discovered evidence of mis-selling of all types of car finance agreements across the country.
Commission was paid on around 99% UK car finance agreements.
The since-banned discretionary commission arrangements (DCAs) saw brokers and dealers hike up the amount of interest they earned without telling buyers.
This is thought to have encouraged sellers to maximise interest rates.
The watchdog clamped down on the practice in 2021 and banned it, but by May, around 20,000 complaints had been logged by the Financial Ombudsman Service.
The watchdog has estimated that around 40% of car finance deals between 2007 and 2021 may have been mis-sold to customers.
The FCA is planning to launch its own redress scheme for consumers regarding the discretionary commission arrangements, which would likely come from the firms involved.
What does it mean for me as a car owner?
The Supreme Court decision, if ruling in favour of the three drivers, could lead to a payout for people who took out a car loan before 2021.
But if the decision goes against the drivers, then the scope of payments could be more limited.
The decision is expected this afternoon.
However, regardless of the court ruling, the FCA is likely to go ahead with its own redress scheme.
Could I be entitled to compensation?
The most crucial next step for motorists who took out a car finance loan between 2007 and 2021 will be the possible FCA redress scheme.
If you were one of the thousands of people who took out a car finance agreement at that time and were not told about the commission arrangement, you might be eligible for the FCA scheme.
However, the watchdog will have to iron out the details of what type of motor finance agreements the redress scheme will include.
Mahesh Vara, a legal director for Shoosmiths, said today’s decision could be a ‘boon to claimants, firms and consumers.’
He said: ‘I think this is one of the first large-scale consumer mis-selling “scandals” of the social media digital age.
‘It’s now leading to a greater expectation of there being almost a guaranteed payment. That is what the FCA will have to consider.’
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