Supreme Court poised to decide the fate of car finance customers in landmark case

Secret commissions a breach of consumer trust

The Court of Appeal’s October judgment highlighted that undisclosed commission arrangements between car dealers and lenders compromise the trust consumers place in dealers to secure the best possible finance deals. 

Our 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. Consumer Voice’s findings reveal that only 21% of car finance customers say they were aware that their dealer could be receiving commission from lenders.

The upcoming Supreme Court hearing is particularly significant given that 99% of car loans involve some form of commission. Undisclosed commissions can lead to consumers paying higher interest rates, resulting in substantial financial detriment over the term of their loans. 

For instance, discretionary commission arrangements – where dealers are incentivised to secure higher interest rates for greater personal gain – were banned by the Financial Conduct Authority (FCA) in January 2021 due to concerns over consumer overcharging. 

Consumer Voice believes car dealers were acting as credit brokers

Consumer Voice argues that car dealers act as credit brokers when arranging finance deals and, as such, owe a legal duty to their customers to secure competitive and fair financing. 

However, undisclosed commissions and incentives can compromise this duty, leading to conflicts of interest where the dealer’s financial gain takes precedence over the customer’s best interests. This concern is underscored by findings that many consumers do not shop around for car finance options, with only 4% researching alternatives before accepting a deal offered by their dealer. 

Each of the three appeals involves the car dealer having arrangements with a panel of lenders, from whom a finance deal would be offered. It’s clear this would have added to the expectation that the car dealer was going to select them a good deal. Despite the existence of the panel the customers were all only offered one finance deal. This is common across the market as most (56%) of car finance customers told us they were only offered one deal. 

What they weren’t aware of, or made sufficiently aware of, were the commissions and wider incentives being offered to dealers from lenders which impact on the dealer’s selection of an offer from the panel. This can cause detriment to the consumer because incentive arrangements such as rights of first refusal, volume bonuses and advance commission arrangements also result in dealers being motivated to introduce consumers to certain lenders irrespective of the fact they may be charged higher interest rates than others available.

We believe in all the cases there was not sufficient disclosure of the commission payments to negate secrecy and therefore the car dealers didn’t make it clear to customers that they couldn’t act impartially. 

Car dealers abused their position of power to exploit customers

Consumer Voice believes the Supreme Court should decide car dealers abused their position of power and exploited vulnerable customers. 

Alex Neill, co-founder of Consumer Voice, emphasises the vulnerability of consumers in the car finance market:

‘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 (68%) had only taken out one car finance loan between 1 April 2014 and 28 January 2021, and most (65%) haven’t taken out car finance again since January 2021. When they do engage with the market they do not shop around. The vast majority, seven in 10 people, took the deal  on the spot. 

This is in stark contrast to their behaviour for other financial products. The majority of people say they shop around for other financial products, unlike car finance, as 68% said they always shop around for car insurance,  66% for home insurance and around half say they always shop around for credit cards, mortgages, savings accounts and bank loans.

Much of this behaviour is because people quite reasonably believed car dealers would act in their best interests.  Six in ten (64%) said they believed their car dealer was only making money on the sale of their car and also understood the cost of their car to be dependent on taking a car finance loan from their dealer. 

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.’

Supreme Court decision could lead to significant compensation

The Supreme Court’s decision could pave the way for millions of claims against car dealers and lenders, potentially leading to significant compensation for affected consumers. Major lenders have already begun setting aside funds in anticipation of potential payouts. For example, Lloyds Banking Group has allocated £1.2 billion to cover potential compensation 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

See more in-depth analysis from Consumer Voice on this issue:

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