Fleets warned of impact to costs from £18bn car loan compensation scheme

The UK’s financial regulator estimates that compensation to victims of car finance mis-selling will likely receive a payment of no more than £950, costing the sector up to £18 billion.

It follows the Supreme Court decision on Friday (August 1) that hidden commissions from lenders to dealers on car loans were not unlawful – avoiding them having to pay compensation to millions more drivers. 

Lenders including Close Brothers and FirstRand had sought to overturn an earlier ruling from the Court of Appeal in October, which dramatically expanded a Financial Conduct Authority (FCA) investigation into car finance commissions. 

The Court of Appeal found that car dealers receiving undisclosed commissions for arranging loans had engaged in unlawful practices. 

The three appeals involved Andrew Wrench, Louise and Carl Hopcraft, and Marcus Johnson, who had cars bought on credit.

However, while the Supreme Court now says that that hidden commissions from lenders to dealers on car loans were not unlawful, it ruled that if commission is extremely high – such as in the case brought by Johnson, where he paid 55% of the total charge or credit including interest and fees to the dealer – it was a “powerful indication” the relationship between Johnson and lender FirstRand was unfair.

The Supreme Court awarded Johnson the amount of a commission plus interest, which potentially opens the door to compensation claims for similarly large commissions.

The Financial Conduct Authority (FCA), which says it will launch a compensation scheme in October with payouts beginning in 2026, stressed that any estimates are “only indicative at this stage and may change”.

The FCA estimates the cost of the scheme to be between £9bn to £18bn.

Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules.

“It’s fair for their customers to be compensated. We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.

“Our aim is a compensation scheme that’s fair and easy to participate in, so there’s no need to use a claims management company or law firm. If you do, it will cost you a significant chunk of any money you get.

“It will take time to establish a scheme, but we hope to start getting people any money they are owed next year.”

While initially welcoming the Supreme Court’s decision, the Finance and Leasing Association (FLA) says it is concerned that allowing claims dating back to 2007, when firms have not been required to hold such dated information, will be difficult.

Stephen Haddrill, director general at the FLA, said: “The evidence base will be patchy at best - we will be interested to see how the FCA addresses this point in its consultation.”

Fleet risk from compensation scheme

The Association of Fleet Professionals (AFP) is warning of a dual risk to fleets from the FCA's compensation scheme, with a potential impact on used car prices and the cost of finance.

Paul Hollick, chair at the Association of Fleet Professionals (AFP), said: “We’ve gone from a situation on Friday where the Supreme Court verdicts suggested the worst risks for the motor finance sector had been removed, to one on Monday morning where the FCA’s intervention has reintroduced the possibility of quite widespread reparations.

“It means we’re going to remain in a situation of considerable uncertainty until the redress scheme is finalised in October.” 

He added: “The risks for the fleet industry here are twofold. If banks and motor finance companies are forced to pay billions in compensation to consumers, it’ll potentially have a knock-on effect on the availability and cost of finance to fleets.

“Also, if it becomes more difficult for used car buyers to access finance, it means there could be an impact on residual values, which is also bad news for fleets.

“We’d like to see the whole situation resolved as soon as possible. Yes, consumers whose legal rights have been ignored should be recompensed fairly but the motor finance market also needs to return to normal functioning as soon as possible.”

Supreme Court decision came late on Friday

Announcing the 110-page judgement on Friday (August 1), Supreme Court president, Lord Reed, said the court was allowing the appeals brought by the finance companies against an earlier ruling.

However, he said: “We uphold Mr Johnson's claim that the relationship between him and the finance company was unfair, and we allow the appeal in his case only because the Court of Appeal made a number of mistakes in reaching its decision.

“Re-taking the decision on a proper basis, we award him the amount of a commission plus interest. The other customers' claims are rejected.”

He explained that he had rejected the claims based on bribery, on the basis that the payment of a commission was not a bribe.

“The law of bribery only applies to persons who owe a single-minded duty of loyalty and are therefore bound to have no personal interest in the matter that they are dealing with,” he said.

“In the present case, the car dealers, plainly and properly, had a personal interest in the dealings between the customers and the finance companies… they were motivated throughout by their interest in selling cars at a profit, it follows that they did not owe any fiduciary duty to the customers.

“Each party to the three corners arrangement, the customer, the dealer and the finance company was engaged at arm’s length from the other participants in the pursuit of its own objectives.

“Neither the parties themselves, nor any onlooker could reasonably think that any participant was doing anything other than considering its own interests.”

The decision came late on Friday (August 1st) at 4.35pm, following a request by the Financial Conduct Authority (FCA), which was concerned that the ruling, whatever it might be, may have on the financial markets, which closed at 4.30pm.

Ian Plummer, Autotrader’s chief commercial officer, says it may be some time before we know exactly how the process of disclosing commission will be enacted, but striking the right balance will be key.

“A pragmatic solution that minimises the impact on an industry that contributes billions to our economy, but also a consumer centric approach that ensures transparency and confidence for millions of buyers,” he added.

Fears costs could have been higher

The car finance scandal has drawn comparisons to the payment protection insurance (PPI) mis-selling crisis, with analysts warning before today’s judgement that the final cost to lenders could reach £40-50 billion.

Major lenders had set aside funds in preparation for potential payouts, with Lex Autolease owner Lloyds announcing earlier this year that it had earmarked £1.25 billion in preparation for such a scenario.

The Government even attempted to intervene in the case, because of the potential impact to the sector. 

In February, the Supreme Court rejected an intervention from the Treasury, which was worried huge amounts of redress payments could upset the car market and make it less competitive.

The Treasury has said it wants to see a “balanced judgement” that delivers compensation proportionate to losses that consumers have suffered and allows the motor finance sector to continue supporting millions of motorists to own vehicles.

Reacting to the Supreme Court's 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.”

The spokesperson added: “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.”

Ian Hughes, CEO of Consumer Intelligence, believes that the Court has “got it right”. He explained: “They’ve targeted the exceptional cases without punishing standard business practices. This provides the clarity the industry needed whilst ensuring accountability where it’s genuinely warranted.

“The industry must meet this challenge constructively. This is an opportunity to demonstrate an unwavering commitment to fairness.

“It’s vital we don’t confuse widespread historic practice with deliberate wrongdoing. The vast majority of firms operated fairly, even if disclosure clarity fell short.

“Targeted, structured redress will ensure fairness without punishing responsible firms . It’s important to remember the industry had already moved away from discretionary arrangements following FCA rule changes in 2021. This ruling effectively tidies up the legacy.

“The FCA’s enhanced Consumer Duty already guides better transparency and outcomes in the market. By working in close partnership with the FCA on a pragmatic redress framework, the industry can correct past wrongs caused by a few bad actors, draw a final line under this issue, and ultimately strengthen consumer trust.

“It is crucial to remember that this is a consequence of legacy practices from a minority of market participants. We urge the FCA to work closely with the industry to design a redress framework that is manageable, efficient, and minimises undue market disruption.”

Background to the three car loan commission cases

The three linked appeals involved cases originally brought by claimants Andrew Wrench, Louise and Carl Hopcraft, and Marcus Johnson, involving cars bought on credit supplied by either FirstRand Bank or Close Brothers.

On each relevant occasion, only one offer of finance was presented to, and accepted by, the claimant.

FirstRand Bank provided the finance in Johnson’s and Wrench’s transactions. The lender in the Hopcrafts’ case was Close Brothers.

In each instance, the dealer made a profit on the sale of the car but also received a commission from the lender for introducing the business to them.

In the Hopcrafts’ case, the commission was kept secret from the claimants.

Wrench and Johnson were both unaware that a commission would be paid, but the lender’s standard terms and conditions made reference to the payment of a commission (of unspecified amount).

Johnson was also supplied with a document, which he signed, indicating that the dealer could receive a commission from the lender.

Each of the claimants brought proceedings in the County Court. All three claimants contended that the commissions amounted to bribes at common law, or to secret profits received by the dealers as fiduciaries in equity.

Wrench was successful before the District Judge at first instance but the Circuit Judge allowed the lender’s appeal.

Johnson’s claims were unsuccessful at first instance, as well as on first appeal except for his claim under the Consumer Credit Act (CCA) which was forwarded to the District Judge for reconsideration.

The Court of Appeal subsequently granted permission for a second appeal in both cases.

The Hopcrafts’ claims were unsuccessful at first instance and their first appeal to a Circuit Judge was then transferred to the Court of Appeal.

They were successful in the Court of Appeal either on the basis of the tort of bribery or on the basis of dishonest assistance. Johnson was also successful in his claim under the CCA.