Lending entities in the motor finance sector remain accountable following a verdict from the Supreme Court
In a significant development for the motor finance industry, the UK Supreme Court has ruled that commission payments to car dealers are generally legal, but some commission arrangements could potentially lead to an unfair relationship under the Consumer Credit Act 1974.
Following the Supreme Court's clarification, the Financial Conduct Authority (FCA) has announced plans to consult on an industry-wide compensation (redress) scheme for motor finance customers who were treated unfairly. The FCA aims to publish this consultation by early October 2025 and finalize the scheme so affected customers can start receiving compensation next year.
The ruling, which was delivered on August 1, 2025, has far-reaching implications for the motor finance market. It recognizes that certain commission arrangements could be unlawful, depending on factors such as the size and nature of the commission, disclosure, and consumer characteristics.
Lord Justice Reed, President of the Supreme Court, advised the verdict be announced after markets were closed or over the weekend to avoid "disorder." The ruling is expected to curb fears of total compensation reaching £30bn, as Santander is on the hook for £295m, Close Brothers £165m, and Barclays £90m, with Lloyds Banking Group setting the highest provisions at £1.2bn.
The FCA's redress scheme will address issues such as commission size, discretion, disclosure failures, and consumer impact. The scheme is intended to deliver fair and consistent compensation and restore confidence in the motor finance market.
Richard Coates, head of automotive at Freeths, stated that particularly large commissions can lead to an unfair relationship. Caroline Edwards, a partner and dispute resolution specialist at Travers Smith, said the ruling was a "major overturning" of a previous Court of Appeal judgment.
The October Court of Appeal judgment stated it was unlawful for banks to pay a commission to a car dealer without the customer's informed consent. However, the Supreme Court found that customers' claims against lenders couldn't succeed based on fairness or tort.
The ruling opens the gateway for consumers to bring claims under the Consumer Credit Act, and it provides a "clear path forward" for the FCA to proceed with a more targeted redress scheme, according to Peter Rothwell, head of banking at KPMG UK.
Johnson's case, which contributed to the ruling, is expected to introduce more uncertainty into the market. The National Franchised Dealers Association (NFDA) has welcomed the Supreme Court's verdict, while one lawyer stated that the ruling was a significant win, and the focus of the case has always been on Johnson's unfair relationship and breach of Consumer Credit rules.
The City watchdog has emphasized that a redress scheme must ensure the integrity of the motor finance market. The Supreme Court's ruling in the landmark motor finance case is a crucial step towards achieving this balance between the interests of lenders, dealers, and consumers in motor finance transactions going forward.
- The ruling by the UK Supreme Court has highlighted potential issues in the banking and finance sector, specifically within the motor finance industry, as it suggested that certain commission arrangements could be unlawful under the Consumer Credit Act 1974.
- In response to this development, the Financial Conduct Authority (FCA) has planned to consult on an industry-wide compensation (redress) scheme for motor finance customers who were treated unfairly, aiming to restore confidence in the motor finance market.
- The motor finance market, which includes various businesses and financial institutions, will be closely watching the FCA's redress scheme, as it is intended to address issues such as commission size, disclosure failures, and consumer impact, with the ultimate goal of delivering fair and consistent compensation.
