Supreme Court concludes pivotal hearing on motor finance commissions

Consumer Voice continues to push for transparency and fairness as lenders appeal car finance ruling

The Supreme Court has concluded its crucial three-day hearing on the legality of undisclosed commissions in car finance agreements. 

The case, brought by lenders Close Brothers and FirstRand’s MotoNovo Finance, challenges the Court of Appeal’s October 2024 decision, which ruled that car dealers must disclose commission payments to customers. 

Consumer Voice has urged the Supreme Court to uphold the ruling, emphasising the importance of transparency and fairness in the car finance market.

Alex Neill, co-founder of Consumer Voice, said:

‘The Supreme Court is the highest court in the land, so whatever it decides goes. The judgment will bring well needed certainty to consumers and the market and it’s good to see the judges acknowledging the need for swift justice.

‘The court has signaled it hopes to hand down a verdict in July and the financial regulator will respond within six weeks. So, consumers should expect compensation could be paid early next year.’

The Financial Conduct Authority (FCA) intervened in the case, arguing that the Court of Appeal’s decision ‘goes too far’ and could have unintended consequences for the broader financial market. 

Lenders have warned that upholding the decision could expose them to compensation claims potentially reaching £44 billion, drastically impacting the industry. 

The Supreme Court’s decision, expected by summer, will have far-reaching consequences for car finance agreements and could set a precedent for other commission-based financial products.

Consumer trust at stake

The Court of Appeal’s ruling underscored how undisclosed commission arrangements between car dealers and lenders erode consumer trust. 

Consumer Voice’s research indicates that 65% of car buyers trust their dealer to offer them the best deal, yet many remain unaware of the commissions influencing these arrangements. We found that only 21% of car finance customers were aware that their dealer could be receiving commission from lenders.

The FCA had already banned discretionary commission arrangements in January 2021 due to concerns that they incentivised dealers to negotiate higher interest rates for their own financial gain. The Supreme Court’s final decision will determine whether past arrangements, in which dealers failed to disclose commissions, constitute a breach of legal duty and justify compensation for affected consumers.

Car dealers as credit brokers

Consumer Voice argues that car dealers acted as credit brokers when arranging finance deals and therefore owed a legal duty to their customers to secure fair and competitive financing. However, undisclosed commissions and incentives may have compromised this duty, leading to conflicts of interest where the dealer’s financial gain took precedence over the customer’s best interests.

A significant issue in the appeal involves the lack of consumer choice. Although many dealers had access to panels of lenders, they often presented consumers with only one finance offer. Consumer Voice’s findings show that 56% of car finance customers were only offered one deal, limiting their ability to seek better alternatives. Furthermore, many consumers were unaware of the commissions and wider incentives influencing their dealer’s recommendation, including rights of first refusal, volume bonuses, and advance commission arrangements, all of which could lead to higher interest rates.

Car dealers’ abuse of power

Consumer Voice maintains that car dealers abused their position of power, exploiting customers who were unfamiliar with the car finance market. Neill has highlights issues around consumer vulnerability:

‘Consumers are often inexperienced when taking out car finance loans, making them particularly vulnerable to hidden costs. The lack of transparency surrounding commissions means many customers are unknowingly paying higher interest rates than necessary. People are unfamiliar with the market—most had only taken out one car finance loan between April 2014 and January 2021, and the majority haven’t taken out car finance again since January 2021.’

Consumer behaviour contrasts starkly with other financial products, where people are more likely to shop around for better deals. While 68% of people always compare car insurance providers, and 66% do so for home insurance, only a fraction actively seek out alternative car finance options before accepting a dealer’s offer.

Neill added: ‘Dealers and lenders must be held accountable for failing to disclose these financial incentives, which compromise their duty to secure fair deals for customers. The Supreme Court has a crucial opportunity to stand up for consumers by upholding the Court of Appeal’s ruling.’

Government urged not to interfere

The case has also sparked debate over potential government intervention in compensation payouts. Courmacs Legal, a Blackburn-based law firm handling over 2.2 million car finance mis-selling claims, has warned against any attempts by the UK Government to shield lenders from financial redress. 

Darren Smith, managing director at Courmacs Legal, stated:

‘It cannot be right that the Treasury gives UK motor finance giants a free pass at the expense of millions of hard-working consumers.’

Smith further emphasised the importance of judicial independence, saying: ‘The idea that, where our highest courts have determined consumers have been wronged by lenders, the Government would either directly or indirectly seek to limit or reduce the redress those victims would receive at court is something which I and many in the legal profession feel strongly about. It undermines the reason why we have the separation of powers in the UK.’

The Supreme Court’s forthcoming ruling will determine whether past industry practices were unlawful and whether compensation claims will move forward. The decision will shape the future of car finance transparency and consumer protection in the UK.

Potential for significant compensation

If the Supreme Court upholds the Court of Appeal’s decision, millions of car finance customers could be eligible for compensation. Major lenders have already begun setting aside funds in anticipation of potential payouts. Lloyds Banking Group, for example, has allocated £1.2 billion to cover possible compensation claims related to car finance mis-selling.

We are encouraging car finance customers to take proactive steps by using our free template letter to ask about any commissions applied to their loans. By seeking transparency and holding dealers and lenders accountable, consumers can work towards ensuring fair treatment in the car finance market.

Consumer Voice research

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