Supreme Court ruling blocks billions in car finance payouts to consumers
Millions of UK motorists hoping for compensation over mis-sold car finance deals have been dealt a blow after a Supreme Court ruling curtailed a potential £44 billion redress crisis for the industry.
The case, brought by consumers against lenders Close Brothers and MotoNovo, centred around the controversial use of secret commissions—payments made by car finance providers to dealerships for arranging loans, often without the customer’s knowledge.
In October 2023, the Court of Appeal found in favour of consumers, sparking fears across the financial sector of a PPI-style compensation crisis, with analysts warning that redress costs could exceed £40 billion.
However, in a partial victory for lenders, the Supreme Court overturned key elements of that ruling on Friday, scaling back the industry’s liability and dashing the hopes of millions who believed they were in line for repayment.
The Court of Appeal had previously concluded that all forms of undisclosed commission were unlawful if the borrower had not been informed or had not consented—and that car dealers, as credit brokers, owed a fiduciary duty to act in the customer’s best interests. The Supreme Court rejected the fiduciary duty element, narrowing the grounds on which compensation claims can proceed.
Despite the reprieve for lenders, the ruling does not close the door entirely on consumer payouts. The Financial Conduct Authority (FCA) is conducting its own review into the motor finance market and is expected to announce next steps within six weeks.
The FCA had paused its investigation to await the Supreme Court’s decision and has already signalled the potential for a formal redress scheme—one that could still cost the industry billions if widespread misconduct is confirmed.
The FCA is reviewing 14.6 million car finance deals involving discretionary commissions, part of an estimated 25.9 million agreements signed between 2007 and 2020. Discretionary commissions were banned by the FCA in January 2021 after it found they created clear conflicts of interest.
Under these arrangements, car dealers could set the interest rate on finance agreements themselves. The higher the rate, the bigger the commission—an incentive that often left customers overpaying on their loans.
Data from the regulator shows these commissions amounted to £8.1 billion during the review period. Since the ban, motor finance companies have been inundated with complaints from consumers alleging they were unaware of the commission structure and had been unfairly charged.
The financial services sector welcomed the Supreme Court’s ruling as a way to avoid wider economic fallout. Lenders had warned that a flood of compensation claims could destabilise the market.
The UK government, which had unsuccessfully tried to intervene in the case, previously indicated it might consider legislative action to prevent a full-scale financial crisis. Ministers are said to be concerned about setting a legal precedent that could ripple into other commission-driven industries, such as energy or telecoms.
Meanwhile, a growing number of claims management companies and law firms had been preparing to pursue mass compensation claims, likening the scandal to the PPI redress wave that cost UK banks more than £50 billion.
Although the Supreme Court’s decision limits the immediate exposure of car finance providers, the FCA’s forthcoming review remains the key determinant of whether widespread compensation is still on the cards.
In the meantime, lenders, lawyers and consumers alike now turn their attention to the regulator’s next move—due by mid-September.
