Finance companies offering auto loans left vulnerable following Supreme Court decision
UK Supreme Court Ruling Partially Overturns Motor Finance Mis-selling Decision
In a significant development on August 1, 2025, the UK Supreme Court delivered a landmark ruling that partially overturned a previous Court of Appeal decision concerning undisclosed commission paid to car dealers in motor finance deals.
The core issue was whether customers should have been fully informed that car dealers were paid a commission (typically 25% of the interest payments) by finance lenders and that this was added to their cost. The Court of Appeal had earlier ruled it unlawful to pay dealer commission without customers' informed consent, but the Supreme Court's reversal limits the scope of redress.
Despite this, the Financial Conduct Authority (FCA) has indicated it will still work to establish an industry-wide redress scheme to provide compensation where justified. This scheme could affect millions of motorists because about 90% of new cars in the UK are financed, and many buyers before January 2021 may have been overcharged due to hidden commissions.
The FCA's redress scheme could be impacted by legislative measures the Treasury is reportedly considering to limit the financial impact. Notably, the banks have already set aside significant provisions for potential compensation. Lloyds Banking Group has set aside the highest provisions at £1.2bn, followed by Santander at £295m, Close Brothers at £165m, and Barclays at £90m.
The ruling may introduce more uncertainty into the motor finance market. However, Lord Justice Reed, President of the Supreme Court, advised that the verdict be announced after markets were closed or the weekend to avoid "disorder".
The National Franchised Dealers Association (NFDA) and KPMG UK's head of banking, Peter Rothwell, have welcomed the verdict, calling for the regulator to act fairly to ensure UK consumers receive a satisfactory result.
Richard Coates, partner and head of automotive at Freeths, has stated that the judgment opens the gateway for consumers to bring claims under the Consumer Credit Act, where particularly large commissions have been paid and the relationship is therefore unfair. Caroline Edwards, a partner and dispute resolution specialist at Travers Smith, described the ruling as a "major overturning" of a previous Court of Appeal judgment.
One lawyer emphasized that the Johnson element, the unfair relationship, and the breach of Consumer Credit rules were at the heart of the case. The Supreme Court's verdict has caused the markets to need time to digest and consider its implications. The FCA will confirm on Monday, August 4, whether it will consult on a redress scheme following the ruling.
The customers' claims against the lenders couldn't succeed based on fairness or tort. However, Johnson's entitlement to compensation suggests the motor finance saga is not yet over. Chancellor Rachel Reeves had reportedly been exploring ways to overrule the Supreme Court should an adverse ruling have been handed down.
In conclusion, while the Supreme Court ruling has reduced the potential scale of compensation for motor finance mis-selling related to undisclosed commissions, the situation remains developing. The government and regulator actions pending will define how redress might be delivered.
- The ruling by the UK Supreme Court on motor finance mis-selling could have a significant impact on the banking and finance industry, as banks such as Lloyds Banking Group, Santander, Close Brothers, and Barclays have set aside substantial provisions for potential compensation.
- The financial services regulator, the Financial Conduct Authority (FCA), is considering creating an industry-wide redress scheme to compensate affected consumers, although the scope of this scheme could be affected by legislative measures under consideration by the Treasury.
- The Supreme Court's decision has opened a potential avenue for consumers to bring claims under the Consumer Credit Act, especially in cases where large commissions have been paid and the relationship between the consumer and the lender is deemed unfair.
