The majority of new cars and some second-hand cars are bought via car finance deals where drivers pay an upfront deposit, borrow the rest from a lender and pay back the loan each month with interest.
Each year some two million cars are purchased this way.
However, many dealers and brokers were paid a behind-the scenes commission by lenders for signing buyers up to these agreements, which some drivers claimed they did not know.
WHY WAS CAR FINANCE IN THE SUPREME COURT?
In October, a ruling by the Court of Appeal deemed that these ‘secret’ commission payments without a consumers fully informed consent were unlawful.
It considered the cases of three people with car finance deals, who argued they did not know about the commission made by their car dealers.
Some lenders challenged that Court of Appeal decision so the case went to the Supreme Court.
WHAT DID THE SUPREME COURT RULE?
It ruled in favour of lenders instead of millions of consumers. Car finance firms did not unlawfully sell products by failing to disclose commissions.
Supreme Court President Lord Reed said the court allowed the appeals brought by the finance companies.
It did uphold one claim that a customer’s relationship with the finance company was ‘unfair’ and that claimant will be awarded the amount of commission plus interest.
Lord Reed then said ‘other customers’ claims are rejected’.
It’s a blow for motorists who did not know about the commission payments involved in their car finance deals.
WILL ANYONE GET COMPENSATION?
The FCA is consulting on setting up a redress scheme for those unknowingly signed up to a discretionary commission agreement (DCA) when they took out their car loans.
In a DCA, lenders allow brokers and dealers to hike interest rates on car finance to increase their commission. These were banned in 2021 by the regulator. The watchdog has been probing DCAs since January 2024.
WHAT DOES THE FCA SAY?
The FCA says: Our detailed review of the past use of motor finance has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers. Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way.
Some consumers have challenged their agreements with lenders through the courts. On Friday the Supreme Court ruled that in many cases commission payments could be legal, but a lender did act unfairly – and therefore unlawfully – due in part to the size of the commission it paid to the motor dealer and how it was disclosed.
The Supreme Court agreed with several factors we had identified which could point towards an unfair relationship and fall foul of the Consumer Credit Act (CCA), whilst recognising it depends on the facts of each case.
Such factors could include:
- the size of the commission relative to the charge for credit
- the nature of the commission, for example, whether it is discretionary
- the characteristics of the consumer
- compliance with regulatory rules
- the extent and manner of disclosure
This clarity helps us because we have been looking at what is unfair and, prior to this judgment, there were different interpretations of the law coming from different courts.
We will now consult on a redress scheme. Redress would depend on non-disclosure of the factors above and the interaction between them.
