Car finance ruling could lead to 23 million drivers being owed compensation

Millions of drivers could be entitled to compensation following a landmark car finance court ruling on Friday, (August 1).

Financial institutions are already preparing for substantial payouts, with some projections suggesting costs could reach £30billion. Consumer advocate Martin Lewis cautioned that the case's outcome carries enormous economic and political consequences and might "shake the foundations" of consumer lending.

The dispute revolves around secret commissions that car dealers received from banks and finance companies. The arrangement meant that higher interest rates paid by customers resulted in larger commissions for dealers.

The Supreme Court's decision - anticipated at 4.35pm after trading closes - could significantly expand the pool of potential claimants.

Mr Lewis, who established MoneySavingExpert.com, explained: "This is going to be a shock announcement coming. It has ramifications not just for car finance firms but right across the financial services sector. Depending on what the decision is, it could even have ramifications across the economy."

Research indicates that more than 23 million individuals anticipate receiving compensation for mis-sold vehicle loans. This development follows a major broadband company's introduction of a new £60 fee with an accompanying deadline for action, reports the Mirror.

Nevertheless, reports indicate the Supreme Court might offer some respite to lenders, leading analysts to reduce their compensation estimates. The impending judgement from the Supreme Court carries political ramifications, with Chancellor Rachel Reeves expressing concern that a substantial compensation bill could reduce banks' lending capacity, potentially hampering economic growth.

Most new cars, and a significant number of second-hand ones, are purchased through finance agreements. Typically, buyers provide a deposit and secure a loan for the remaining amount.

However, allegations have surfaced that dealers were enrolling customers in Personal Contract Purchase (PCP) or Hire Purchase deals without their knowledge, pocketing a hefty fee - known as Discretionary Commission Arrangements (DCA) - between 2007 and 2021. These arrangements account for approximately 40% of car finance deals.

Adding to lenders' woes, last year's ruling by the Court of Appeal - the country's second highest court - sent tremors through the industry. The court determined that non-disclosure of commission levels also constituted a breach of rules.

This decision expanded the potential compensation scope to encompass 99% of all car loans. It is this case, centred around Commission Disclosure Complaints, on which the Supreme Court is set to rule.

Mr Lewis stated: "If the Supreme Court upholds the Court of Appeal's decision the knock on effects could be substantial on other forms of lending and on the economy. To be honest it could shake the foundations of consumer lending in the country, meaning less possible available credit for many. So much so that I have concerns that it could do more harm than good."

The Financial Conduct Authority, the City's regulatory body, initiated an enquiry into DCA mis-selling practices in January of the previous year. The FCA has indicated it will determine within six weeks of the Supreme Court ruling whether to establish a complimentary industry compensation programme for motor finance clients.

This development comes as worries mount that individuals could forfeit up to 30% of potential compensation by enrolling in costly programmes they don't require. Both the FCA and the Solicitors Regulation Authority (SRA) are cautioning legal practices and claims management firms (CMCs) to ensure adherence to regulations governing the handling of motor finance commission claims.

These authorities want such companies to notify clients about the compensation programme's existence, should it be established, which would enable them to pursue claims independently without cost. Paul Philip, chief executive of the SRA, expressed his concerns, stating: "We are very concerned about some of the practices we are seeing in the motor finance commission claim market. Law firms have a regulatory duty to act in the best interests of their clients. But if they mislead clients, fail to get their explicit consent, do not explain cost information clearly or are not sharing the required information on free alternative routes before signing them up, they are clearly failing to meet their obligations."