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Lenders have avoided potentially having to pay compensation to millions of drivers after the Supreme Court ruled they are not liable for hidden commission payments in car finance schemes.
Two lenders, FirstRand Bank and Close Brothers, went to the UK’s highest court to challenge a Court of Appeal ruling which found “secret” commission payments paid by buyers to car dealers as part of finance arrangements made before 2021 without the motorist’s fully informed consent were unlawful.
The ruling in October last year found three motorists, who all bought their cars before 2021, should receive compensation after they were not told either clearly enough or at all that the car dealers, acting as credit brokers, would receive a commission from the lenders for introducing business to them.
Lawyers for the lenders told the Supreme Court at a three-day hearing in April the decision was an “egregious error”, while the Financial Conduct Authority intervened in the case and claimed the ruling “goes too far”.
The three drivers, Marcus Johnson, Andrew Wrench and Amy Hopcraft, opposed the challenge.
Giving a summary of the Supreme Court’s ruling on Friday, Lord Reed, one of five justices who heard the case, said they had allowed the lenders’ appeals.
He said: “Each party to the three-cornered arrangement – the customer, the dealer and the finance company – was engaged at arm’s length from the other participants in the pursuit of their own objectives.”
However, the judges upheld a claim brought by Mr Johnson that his relationship with the finance company had been “unfair”, awarding him the commission amount of £1,650.95 plus interest.
In their full 110-page judgment, Lords Reed, Hodge, Lloyd-Jones, Briggs and Hamblen said that car dealers did not have a relationship with their customers that would require them to act only in the customers’ interest.
They said: “An offer to find the best deal is not the same as an offer to act altruistically.”
Following the ruling, a Treasury spokesperson said: “We respect this judgment from the Supreme Court and we will now work with regulators and industry to understand the impact for both firms and consumers.
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“We recognise the issues this court case has highlighted. That is why we are already taking forward significant changes to the Financial Ombudsman Service and the Consumer Credit Act.
“These reforms will deliver a more consistent and predictable regulatory environment for businesses and consumers, while ensuring that products are sold to customers fairly and clearly.”
In a statement, Close Brothers said: “Close Brothers is considering the Supreme Court’s judgment and will make any further announcements as and when appropriate.”
In a letter to the Supreme Court in December last year, the FCA said almost 99% of the roughly 32 million car finance agreements entered into since 2007 involved a commission payment to a broker.
Mr Johnson, Mr Wrench and Ms Hopcraft all used car dealers as brokers for car finance arrangements for second-hand cars, all worth less than £10,000, before January 2021.
Only one finance option was presented to the motorists in each case, with the car dealers making a profit from the sale of the car and receiving commission from the lender.
The commission paid to dealers was affected by the interest rate on the loan.
The schemes were banned by the FCA in 2021, with the three drivers taking legal action individually between 2022 and 2023.
Ms Hopcraft, then a student nurse, bought her replacement car in 2014 through an agreement with Close, which paid the car dealership £183.26 in commission.
Mr Wrench, described by the Court of Appeal as a “postman with a penchant for fast cars”, entered into two hire-purchase agreements for an Audi TT coupe and a BMW 3 Series, with FirstRand, in 2015 and 2017, respectively, paying hundreds in commission in total.
Mr Johnson, then a factory supervisor, was buying his first car in 2017 and paid the £1,650.95 in commission as part of his finance agreement with FirstRand for the Suzuki he purchased.
After the claims reached the Court of Appeal, three senior judges ruled the lenders were liable to repay the motorists the commission due to the lack of disclosure about the payments.
Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis said last year that while each case was different, “burying such a statement in the small print which the lender knows the borrower is highly unlikely to read will not suffice”.
But in Friday’s Supreme Court judgment, the five justices said: “No reasonable onlooker would think that, by offering to find a suitable finance package to enable the customer to obtain the car, the dealer was thereby giving up, rather than continuing to pursue, its own commercial objective of securing a profitable sale of the car.”
They continued: “We conclude that, to the extent that the Court of Appeal’s judgment and the respondents’ case depends upon the recognition of a fiduciary obligation of undivided loyalty on the part of the dealer when selecting and negotiating a finance package for the customer, they are wrong.”
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