Car finance limits exist, but lenders still face responsibility

Supreme Court Ruling Offers Relief but Leaves Room for Further Claims

The recent ruling by the Supreme Court has brought a sense of relief to senior executives in the finance and banking sectors, though it’s unlikely that this will lead to any celebratory gestures like popping champagne corks. The decision significantly reduces the potential compensation bill that lenders could face, offering some respite from the previously looming £30bn to £40bn liability.

While the government stepping in to assist lenders seems less likely now, the industry is still not entirely off the hook. The Financial Conduct Authority (FCA) may still initiate a redress scheme for cases where dealers had financial incentives to push up interest rates on loans. This means that even with the Supreme Court's ruling, there could still be billions in compensation claims.

One key point from the ruling was the upholding of a consumer claim where commission payments were deemed unfair. This sets a precedent that could encourage others to pursue similar cases. The Supreme Court’s intervention was highly anticipated since October, when an Appeal Court issued a verdict in three test cases that could have led to a surge in compensation claims.

In those cases, individuals who bought cars on finance argued they were unaware that the deals involved commission payments made by lenders to dealers. They claimed these payments amounted to bribes or secret payments. The Appeal Court judges agreed, stating that such commissions were illegal if the buyer hadn’t given their "informed consent." They also concluded that dealers had a "fiduciary duty" towards customers when arranging car loans, meaning they should act in the customer’s best interest.

This meant that millions of car buyers could potentially claim compensation if they could show that dealers didn’t clearly disclose the commission payments. However, the Supreme Court dismissed the idea that dealers had a "single-minded duty of loyalty" to their customers. Instead, the court emphasized that dealers had personal interests in the finance agreements they were involved in.

Despite this, the court did side with one of the claimants—Marcus Johnson, a factory worker. It ruled that his finance agreement was "unfair" under the Consumer Credit Act due to the large commission payment and the fact that he was misled about the relationship between the dealer and the lender. This decision could open the door for other cases where commission payments are considered excessive.

Another unresolved issue is what happens in cases involving Discretionary Commission Agreements (DCAs). These were finance deals where dealers could set the interest rate within a scale, with higher rates leading to more commission. The FCA banned such deals in 2021 and is considering whether to launch a redress scheme for affected consumers. If implemented, this could lead to significant claims, though the exact compensation amounts remain unclear.

Analysts believe the potential compensation bill could still be substantial. Richard Barnwell, a financial services advisory partner at BDO, estimates that if discretionary commission arrangements are deemed unfair, redress could range from £5bn to £13bn or more. Martin Lewis, founder of MoneySavingExpert, suggests the figure might be closer to £10bn rather than the previously feared £40bn.

While the Supreme Court has narrowed the scope of potential claims, the finance industry still faces uncertainty. The Treasury has stated it will work with regulators and the industry to understand the impact on both firms and consumers. However, the likelihood of government intervention through retrospective legislation to protect financial firms has diminished significantly.

The law of bribery applies only to those who owe a single-minded duty of loyalty and have no personal interest in the matter. In this case, car dealers clearly have personal interests in the dealings between customers and finance companies. This distinction underscores the complexity of the situation and the ongoing challenges for both lenders and consumers.