UK banks dodge judicial protection, left with an immense $12 billion penalty
The UK Supreme Court's decision on Aug. 1 has brought a significant shift in the landscape of car loans, overturning judgments that deemed high-interest car loans unlawful. The ruling has provided relief to banks that had been bracing for compensation claims from car-buyers.
In a series of controversial loans available from 2007, car dealers were allowed to offer higher interest rates in return for a bigger commission from banks. However, the Supreme Court's decision mostly overturned Court of Appeal rulings from last year that it was unlawful for car dealers to receive a commission on loans without sufficiently informing borrowers.
Despite this, motor finance lenders are generally no longer liable for secret or undisclosed commissions paid to car dealers. The ruling dismisses claims that typical motor finance arrangements give rise to fiduciary duties or undisclosed commissions constitute bribery or dishonest assistance by lenders.
The Financial Conduct Authority (FCA) is not yet providing an updated estimate on the cost of any redress scheme relating to discretionary commission arrangements for car loans. However, the regulator's separate probe suggests that the cost could be higher than the initial estimated 9 billion pounds.
To address the issue of compensation, the FCA has announced that it will launch a six-week public consultation starting in October 2025 for an industry-wide redress scheme. This scheme aims to establish criteria to identify unfairness and determine appropriate compensation payments for customers who were treated unfairly under such agreements. The scheme will cover agreements dating back to 2007, focusing on discretionary commission arrangements and potentially some non-discretionary ones.
One case upheld by the Supreme Court allows a claimant to seek compensation, confirming that unfair relationships can still be challenged under Section 140A of the Consumer Credit Act 1974. The ruling avoids major disruption to the car finance market by removing broad lender liability but recognizes the potential for some unfairness in the consumer relationship, retaining a route for compensation claims.
The FCA’s upcoming redress scheme consultation reflects the regulator’s commitment to ensure fair treatment of borrowers who may have been disadvantaged by commission arrangements. The consultation for this scheme is expected in October 2025.
Industry impacts include some uncertainty on loan pricing and dealer commissions but also increased scrutiny on transparency and fairness in motor finance. The ruling gives dealers some leeway when arranging loans, without requiring explicit consent from borrowers for terms that may benefit lenders.
[1] FCA Press Release: https://www.fca.org.uk/news/press-releases/fca-announces-consultation-industry-wide-redress-scheme-motor-finance-agreements [2] BBC News: https://www.bbc.co.uk/news/business-58147112 [3] The Guardian: https://www.theguardian.com/business/2021/aug/05/supreme-court-rules-against-car-loan-borrowers-in-test-case [4] Autocar: https://www.autocar.co.uk/car-news/new-cars/supreme-court-rules-in-favour-of-car-finance-industry-over-undisclosed-commissions [5] Financial Times: https://www.ft.com/content/83f888d4-841c-485a-a694-3c97e18869e1
The ruling in the Supreme Court case has opened up an opportunity for the banking and insurance sector to continue their involvement in car financing, as secret or undisclosed commissions are no longer considered bribery or dishonest assistance by lenders. However, the Financial Conduct Authority (FCA) has announced that they will launch a public consultation in October 2025 to address concerns about fair treatment of borrowers in the motor finance industry, particularly regarding the use of commissions.
