Supreme Court's Game-Changer: Millions Left Out of Car Finance Compensation

In a recent Supreme Court ruling, millions of UK motorists have been dealt a significant blow: they will not be able to claim compensation for hidden commissions on car loans. The court favored finance companies in two out of three test cases concerning commission payments made by lenders to car dealers, effectively reversing earlier rulings that had raised hopes of widespread compensation claims, reminiscent of the PPI mis-selling scandal.

The Supreme Court deliberated on three appeals, led by FirstRand Bank and Close Brothers, who challenged a previous ruling that deemed it unlawful for car dealers to earn hidden commissions from lenders prior to 2021. This earlier ruling indicated that millions of motorists could seek restitution based on how their car loan interest rates were structured, opening the door to potential payouts in the billions.

However, in the case of Marcus Johnson, the court sided with the borrower due to the substantial commission (55% of total charges) implying an unfair relationship with the lender. Johnson expressed mixed emotions about the ruling, celebrating his win while lamenting for those left without compensation options, calling it a “big bag of salt to go with” his victory.

Each year, about two million cars are financed in the UK, with around 90% purchased through these financing methods. Despite the court’s narrowing of compensation claims, many consumers could still qualify, particularly those affected by discretionary commission arrangements (DCAs) — a practice now banned since 2021, where higher interest loans meant larger commissions for dealers.

Financial experts estimate that claims related to DCAs could amount to £5-£13 billion or more. Martin Lewis, founder of Money Saving Expert, anticipates potential compensation reaching £10 billion and stressed the expectation of a redress scheme from the Financial Conduct Authority (FCA). The FCA has indicated it is considering launching a compensation scheme, aiming to bring clarity to affected consumers swiftly.

Consumer advocates expressed disappointment over the ruling but emphasized the need for the FCA to move urgently in establishing a means for consumers to reclaim what they are owed. Meanwhile, the judgement is seen as a positive outcome for the finance industry, restoring clarity in car finance dealings.