A landmark court ruling on car finance commissions has prompted lenders to hold urgent talks with the UK Treasury and regulators as fears grow about the cost of a redress scheme. Some estimate the ruling could cost the sector as much as £16 billion ($20.8 billion).

And FCA chief executive Nikhil Rathi told guests at an Investment Association dinner in London on Tuesday night that the regulator has “paused until December 2025 the eight-week deadline that firms have to respond to complaints” and said “we need clarity on whether this is the courts’ final word on the issue.” The two lenders involved in the case, Close Brothers and Firstrand, intend to appeal.

Stephen Haddrill, director general of the Finance and Lending Association (FLA), which represents many consumer loan companies, said the “significant” ruling had implications “which stretch far beyond the motor finance sector, making it an issue that demands the immediate attention of the FCA.”

Finance market scandal

Our regular columnist Gavin Stewart warned back in February that the UK could be heading for a major finance market scandal, and we’ve covered developments in the case since then. Last week, the UK Court of Appeal ruled it was unlawful for car dealers to receive a commission from a lender providing motor finance to a customer unless it was disclosed to the customer and they gave informed consent to the payment.

He said: “There was always a reasonable chance the motor finance story would shift in this direction, not least given previous regulatory experience of other issues, so it’s disappointing the FCA didn’t play a longer game from the outset. The original timetable, heavily reliant on a skilled person report by EY, always seemed unrealistic,”

Consumer finance expert Martin Lewis estimates around 40% of car finance deals contained hidden discretionary commission arrangements.

As Rathi noted: “The judges’ ruling was rooted, not in the FCA’s rules, but the longstanding common law principle of fiduciary duty which meant that the broker – the car dealer here – must act in the best interests of the customer and not put themselves in a position of conflict.”

The ruling wiped out almost a quarter of Close Brother’s shares. The lender is the most exposed after the ruling and has lost half its market values since the investigation was announced in January. It has paused selling new car loans.

“In the absence of action soon by the FCA ,the Financial Ombudsman Service will find itself facing a huge increase in Complaints. We expect to submit over 20,000 alone this week.”

Darren Smith, MD, Courmacs Legal Ltd

Lloyds Banking Group, which owns the UK’s largest car finance provider Black Horse, saw shares dip 7% before closing on a 2% drop on the day of the ruling. And Santander delayed publication of its full results while it assesses the impact of the judgment.

According to Rathi, the industry is asking for a freeze on complaints about other types of car finance. He said: “We are considering this carefully and working at pace through the potential benefits and risks of doing so.”

He went on: “We are encouraging firms to engage with us as they consider the impact the court judgment has on their products and services, and we are grateful for the way firms have acted responsibly so far.

“We are working closely with the financial services sector, the Financial Ombudsman Service and the Government to understand any wider consequences and further steps needed.

“While the case itself was not focused specifically on discretionary commission, it clearly relates to our work to determine whether motor finance customers have been overcharged because of the past use of discretionary commission agreements.”

One million claims

Darren Smith, MD of Courmacs Legal Ltd, a firm dealing with more than one million motor finance claims, told us: “The question of redress to consumers affected by inappropriate practice in the provision of motor finance has been under review since 2019,” he said.

“Despite the investigations by the FCA which led to a complete ban on some practices the FCA has still not set out how, when and what redress consumers will receive. The courts have made more progress than the FCA and delivered a judgment on Friday which should make the FCA’s task much easier. The judgment extended the number of consumers who could be due redress but despite this the FCA are no further forward.

“The FCA has already suggested that redress may not be paid until 2026 and even that has been called into doubt by calls from some lenders to extend the pause further.

“We have already identified a significant number of our own clients who face potential time limits on their ability to make a claim and any further pauses could mean 100’s of thousands more consumers find themselves out of time to make a claim just at a time when the amount of redress due to them has been increased by the Court of Appeals judgment.”

“In the absence of action soon by the FCA, the Financial Ombudsman Service will find itself facing a huge increase in Complaints. We expect to submit over 20,000 alone this week.”

Ruling explained

The ruling by Lady Justice Andrews, Lord Justice Birss and Lord Justice Edis came in Johnson v Firstrand. The judges said the claimants were “financially unsophisticated consumers” who engaged car dealers as brokers to arrange hire-purchase agreements on second-hand cars. Dealers made a profit on the sale in each case, and also received a commission from the lender.

In one of the three claims lodged, the commission was kept secret from the claimant, and in the other two the claimant did not know and was not told a commission would be paid, although the lender’s standard terms and conditions referenced the possible payment of a commission.

The judgment said that because dealers were acting as sellers as well as credit brokers, they owed the claimants the “disinterested duty” to inform them. It said: “In all three cases there was a conflict of interest and no informed consent by the consumer to the receipt of the commission.

“The very nature of the duties which the credit broker undertook gave rise to a ‘disinterested duty’ unless the broker made it clear to the consumer that they could not act impartially because they had a financial incentive to put forward an offer from a particular lender or lenders.

“It is precisely because the brokers were in a position to take advantage of their vulnerable customers and there was a reasonable and understandable expectation that they would act in their best interests, that they owed them fiduciary duties.

“In this particular context the dealers/credit brokers would owe both a disinterested duty and a fiduciary duty of loyalty to their customers, unless they made it clear that they did not accept such duties.”