The Supreme Court’s car finance ruling backs big lenders – but leaves consumers in the cold
by Dean Dunham · LBCBy Dean Dunham
The Supreme Court has ruled that lenders won’t have to pay compensation to millions of motorists over car finance loans, in a judgment that has almost certainly saved the car finance industry, and probably lenders in other consumer goods markets, such as furniture and appliances.
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But the ruling has already sparked a great deal of speculation and confusion – such as whether the judges bowed to political pressure and whether the ruling has killed ALL car finance claims. Here’s what you need to know:
What is the background to the ruling?
In October last year the Court of Appeal handed down a judgment in relation to three cases where the claimants each purchased cars via credit agreements. In each case, the dealership received a commission from the lender for introducing the business, which the three claimants argued they were unaware of as this was not disclosed to them – therefore making these “secret commissions”.
The Court of Appeal found that “secret commissions”, as part of finance arrangements made before 2021, were unlawful on the basis that the consumer had not provided their fully informed consent.
Following the Court of Appeal decision, the lenders involved in the case (namely Close Brothers and FirstRand Bank) lodged an appeal to the Supreme Court.
What was the legal basis for the challenge?
The court had to consider three legal issues in relation to the claimants’ claims that the car dealers should have informed them about commissions paid to them by the finance providers, namely: 1) whether this amounted to a ‘bribe’; and/or 2) whether the car dealers owed the claimants a ‘fiduciary duty’, which was therefore breached when they failed to disclose the commission payments; and 3) in relation to one of the cases only, whether failing to disclose the commission was ‘unfair’ under the terms of the Consumer Credit Act.
Today’s judgment
Judges rejected claims that the payments amounted to ‘bribes’ and the argument that salesmen had a ‘fiduciary duty’ to look out for the customers’ interests. In relation to both arguments, it was ruled that: i) the car dealers clearly had their own ‘personal interest’ to get the finance agreements concluded between the finance provider and customer, and for there to be a ‘bribe’ or for a ‘fiduciary duty’ to exist, the car dealers would have to have a ‘single minded duty of loyalty’ to the customer (and therefore must have had no personal interest in the transaction) - which clearly was not case and never would be.
The third argument only applied to one of the claimants (Mr Johnson). Here the court considered if an unfair relationship had been formed (between Mr Johnson and the car dealership/finance provider), as defined under the Consumer Credit Act. The court was careful to make clear that just because a commission has not been disclosed (fully or partially), it does not follow that an unfair relationship has been formed – which is a departure from what we saw during the PPI claim days. Instead, the court said there will be a range of factors that may be necessary and that they would need to be considered on a ‘case by case’ basis. In the case of Mr Johnson, there were two significant factors that led the court to rule in his favour: 1) the size of the commission – which amounted to 55% of the total charge for credit; and 2) the fact that there was a commercial tie between the finance provider and the car dealer (which meant the car dealer would give the finance provider ‘exclusivity’ – so would not ‘shop around’ for the consumer). The court held that this important information should have been provided to Mr Johnson prior to the finance agreement being completed.
Has the court bowed to Government pressure?
The Financial Conduct Authority (FCA), which regulates the finance sector, told the Supreme Court that almost 99 per cent of the circa 32 million car finance agreements entered between 2007 - 2021 involved a commission payment to a broker and therefore that the total compensation bill, if the court ruled in favour of the customers, would be in the billions of pounds. There was also wide speculation that the Treasury was gearing up to introduce new law to effectively overturn a ruling in favour of the customers, as it was concerned that this would have a catastrophic impact on the economic growth.
Whilst there were clearly concerns voiced, I do not believe the Supreme Court was swayed by this. It is clear in law that there cannot be a bribe and you cannot owe a fiduciary duty when you clearly have your own interests at heart – so my view is this judgment in relation to these two legal arguments is absolutely correct.
The ruling in relation to the unfair relationship argument is more concerning and, in my view, harsh on consumers. Mr Johnson won his case on facts specific to his case and has opened the door to finance providers and car dealers to reject such claims unless commissions are at least 55% of the total charge for credit, and where a ‘relationship’ between the finance provider and car dealer existed and was not disclosed – this will create a high bar for claimants and, in my view, goes well beyond what was intended when the Consumer Credit Act was enacted.
Has the ruling extinguished all car finance claims?
No, but it has certainly taken away the majority. The judges in the Supreme Court case did not consider discretionary commission arrangements, which is where brokers and dealers could increase the amount of interest they charged customers (without telling them) on Personal Contract Purchase (PCP) and hire purchase agreements up to 2021. When this happens, the car dealerships’ commissions increase. These claims could still have legs and it appears that the FCA will now be considering the position so it will be a ‘wait and see’ scenario.
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